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Share Name | Share Symbol | Market | Type |
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Microsoft Corporation | NASDAQ:MSFT | NASDAQ | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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Cost advantages are encouraging many small and medium-sized businesses, as well as some large organizations, to transfer either a part or the whole of their operations to the cloud. We expect this change to be a major driver of growth for the industry in the foreseeable future.
Consumer Electronics
With ultra-portable computing devices gaining popularity, the distinction between consumer and computing is blurring in some cases. Of course, the consumer electronics market also includes other gadgets such as LCD TVs, Blu-ray players and smartphones.
The problem with this segment being a major driver of revenue is its inherently low margins. Competition is fierce and aggressive pricing is the rule of the day. Since semiconductors made for consumer goods are in the nature of components, there is ever-increasing pressure on their prices that correspondingly squeeze margins.
The Consumer Electronics Association (“CEA”) expects global consumer electronics sales to be up 5% this year, driven by strength in emerging Asia/Pacific countries (to grow 18%), Middle East and Africa (11%), Latin America (11%) and Central/Eastern Europe (9%). North America is expected to be flat, while both developed Asia/Pacific countries and Western Europe are expected to decline. The products expected to drive this growth are tablets (up 59%), smartphones (22%), home audio (5%) and mobile PCs (3%).
Other Markets
Communications infrastructure spending is currently being driven by China and India. The SIA expects infrastructure spending in these geographies to remain the major driver of semiconductor sales. The domestic market will be driven by increasing data volumes.
Medical Devices is an upcoming area, and semiconductors targeted at this market are beginning to do well.
The automotive end market is an emerging area for semiconductors. The growing electronic content within this market is a secular trend, as demand for safety, infotainment, navigation and fuel efficiency continue to increase. As a result, semiconductors serving this market should grow stronger than the industry over the next few years, although we may see some changes in days to come, since nearly a fifth of vehicle production has moved to China and we may expect more to follow.
The aerospace and defense markets are considerably dependent on government spending and policy-making. The commercial aerospace market (which lags an economic downturn or recovery) has started to look up, given the increasing passenger and cargo traffic. Production increases should be a positive for the semiconductor industry.
The outlook for defense spending, on the other hand, is not as bright. Moreover, the focus on terrorist activity remains, so spending on intelligence systems and basic weaponry is still strong. A longer-term driver for semiconductor manufacturers is the growing importance of electronic weaponry. So semiconductor manufacturers serving these markets continue to see mixed results, depending on the customers served.
Given the end markets driving the current strength in the industry, we believe that manufacturers of flash memory (particularly NAND and also NOR) will continue to see strong demand (although temporary periods of over-supply will impact sales). DRAM is likely to see another difficult year, while logic sees improvement.
Ever Smaller & More Powerful
The demand for greater functionality in smaller and more power efficient gadgets is leading to greater integration within the semiconductor device. This is leading to increased demand for the system-on-a-chip (SoC), which is a single device incorporating a microprocessor, digital signal processor or graphics core, as well as memory and logic.
Within SoCs, both application-specific integrated circuits (ASICs) and application specific standard products are expected to do well (ASICs are usually customized for a single buyer, while ASSPs may have multiple buyers).
Major Players
The major players in the industry may be categorized into chipmakers (OEMs-whether fabless or otherwise), equipment and material suppliers, and foundries.
Chip-Makers
According to estimates from IHS iSuppli, Intel Corp (INTC) and Samsung remained the top two semiconductor suppliers in 2011, while Texas Instruments (TXN) overtook Toshiba Corp. to attain the number three position (helped by the National Semiconductor acquisition).
Renesas remained at number 5, followed by Qualcomm (QCOM), which moved up from the ninth position in 2010. STMicroelectronics (STM) remained at number 7, with Hynix, Micron Technologies (MU) and Broadcom (BRCM) in the eighth, ninth and tenth positions, respectively. Applied Micro Devices (AMD) crept up from number 12 to number 11.
Equipment Makers
Gartner estimates that spending on semiconductor capital equipment increased 13.7% in 2011, on top of a 118.4% increase in 2010. The increase was almost totally driven by wafer fab equipment (“WFE”), with other segments declining mid-single-digits.
However, the research firm expects the equipment market to decline 19.5% to around $52 billion in 2012, growing 19.2% the following year. The decline is expected to be across all segments -- WFE declining 22.9%, automated test equipment (“ATE”) declining 16.5% and packaging assembly equipment (“PAE”) declining 13.5%.
SEMI estimates are slightly different. The research firm expects semiconductor equipment sales to decline 10.8% this year, following a 4.7% increase in 2011. The research firm expects all geographies except South Korea to decline in 2012, and rebound thereafter in 2013.
The increased spending on technology upgrades during 2011 resulted in sufficient capacity for 2012 and 2013. However, the growing demand for semiconductors is likely to encourage the next wave of spending some time in 2013. At that time, we are likely to see some new fabs, which were averted to an extent in the current cycle through the use of superior technology.
Moreover, given that the growth in mobile computing and consumer electronic devices is likely to outpace growth in all other semiconductor applications, memory manufacturing capacity should increase the most.
Latest research from VLSI shows that ASML Holdings (ASML) surpassed Applied Materials (AMAT) to attain the number one spot in 2011. This was possible because of increased spending on lithography tools during the year.
Therefore, while the top 15 equipment suppliers grew just 13%, ASML and Nikkon (another supplier of lithography tools) together grew 27%. Tokyo Electron, KLA-Tencor (KLAC) and Lam Research (LRCX) occupied the next three positions, respectively.
However, the story could change again in 2012, because of consolidation in the market. This year, Applied will include Varian (currently number 13 from 10 months as an independent company in 2011), Lam will merge with Novellus (NVLS) (currently number 10) and Advantest (number 8) will include a full year of Verigy.
Foundries
The pureplay Foundry segment has undergone significant changes over the past few years although the top five positions have not changed much, according to research from Gartner. Taiwan Semiconductor Manufacturing Company (TSM) remains the leader by far, followed by Taiwan-based United Microelectronics Corp (UMC). GlobalFoundries remains in the third position that it obtained in 2010, pushing the Chinese foundry Semiconductor Manufacturing International Corp (SMI) to number four. The only change was with respect to specialty foundry TowerJazz (TSEM), which displaced Dongbu Hi-Tech to jump to the fifth position.
A few clear leaders are emerging in the foundry segment – Taiwan Semiconductor at the trailing edge, GlobalFoundries at the leading edge and Tower Semiconductor in the specialty category (analog). Additionally, Intel and Texas Instruments’ foundries make them two strong contenders with leading edge capabilities.
OPPORTUNITIES
Manufacturing digital ICs is expensive, as it requires state-of-the-art technology and processes. On the other hand, digital products are cheaper, so cost recovery is more difficult. This has led to specialization in the industry and a greater contribution from Asian manufacturers. However, a significant portion of the intellectual property remains with the domestic companies.
One of the primary beneficiaries of the growth in mobile phones, tablets and the like is ARM Holdings (ARMH), with its power-efficient, low-performance chip architecture that dominates the growing mobile phone and tablet markets. With new versions of ARM chips coming to market, it is likely that the chips will gradually spread to the server segment as well (probably not a 2012 phenomenon).
Others would be Qualcomm (QCOM), Samsung and Texas Instruments, all of which are big semiconductor manufacturers that use ARM architecture. As such, we remain relatively positive about Samsung and Qualcomm in 2012.
We are also optimistic about Intel and AMD, given their new product ramps and focus on the data center segment. Although we are a wee bit cautious about Intel’s growth initiatives in mobile and believe that execution will be key to delivering on its plans, the company’s market position, cash balance, technology lead and management strategy and execution are positives in our opinion.
AMD is also worth watching, as management has been delivering on its promises. Moreover, the company is seeing some real success in its graphics business, which should complement initiatives targeted at rationalizing its debt, increasing focus on R&D and operation of a lower-cost model.
The analog and mixed-signal market is dependent on innovation. Consequently, these products generate higher margins than digital products. They are also more customized and have longer life cycles.
Most of these companies are seeing somewhat stronger demand right now, although there are some issues based lingering effects of the Thailand floods and economic sluggishness. We are particularly positive about Semtech Corp (SMTC), given its recent deal wins, product cycles, order rebound and position in the communications market.
Companies like Linear Technology (LLTC), which has a focus on the automotive end market that should do well this year, or Intersil Corp (ISIL) and Maxim Integrated Products (MXIM), which are expected to benefit from growth trends in the computing end market.
WEAKNESSES
We believe that 2012 will be a transitional year, with inventory rebalancing and adjustment. Given the uncertainties in demand, we think that semiconductor manufacturers will curtail investment in capacity although technology purchases could continue. DRAM inventory remains in excess although the flash market is slightly better off.
In this environment, we would avoid investment in equipment companies, such as Applied Materials (AMAT), KLA-Tencor (KLAC), Lam Research (LRCX), etc. We particularly discourage investment in Applied Materials at this time because of its exposure to solar, where there is significant oversupply and resultant pricing pressure.
The foundry segment will also have a moderate year, although the second half should be somewhat better. We therefore continue to believe that investors should treat foundries, such as Taiwan Semiconductor (TSEM), United Microelectronics (UMC), and Semiconductor Manufacturing International (SMI) with caution.
We have turned more cautious about Analog Devices, given that nearly half its revenue comes from the industrial market, which appears sluggish. Texas Instruments (TXN) is also expected to have its own share of problems. The top line will continue to be impacted by the phasing out of the baseband business and it is now saddled with extra capacity that will most likely be under-utilized until demand increases significantly (not expected until 2013).
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