These Semiconductor Companies Can Be Good Investments
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The semiconductor industry is showing continuous growth, but in a cyclical pattern with high volatility. According to World Semiconductor Trade Statistics, or WSTS, semiconductor industry sales are expected to grow 4.5% this year, against a decline of 3.2% last year. The decline in the computer market segment and rising demand for analog and embedded segments are some of the reasons behind this volatility.
In light of this growth, here is an analysis of three semiconductor companies. To enhance revenue, these companies are adopting different strategies like launching new products and closing old manufacturing facilities. But, will these strategies provide good long-term investment opportunities?
Baseband growth and 5G Wi-Fi chips
On June 13, 2013, Broadcom (NASDAQ: BRCM) introduced a new 3G baseband chip, the BCM23350 for high performance in low-range smartphones. Baseband is the chip which manages all radio transmissions; the BCM23350 has a quad-core HSPA processor which runs at a speed of 1.2 gigahertz. The quad core processor will provide multitasking and rich graphic capabilities for smartphones.
It is expected that the new BCM23550 chip will contribute $130 million to Broadcom's second-quarter sales in 2013, and that its sales of baseband chips will grow 49.3% year-over-year to $522.2 million this year and $742.4 million next year.
The company recently launched 5G Wi-Fi combination chips for low-cost consumer devices and extended this technology for use in connected homes. These 5G Wi-Fi chips are three times faster and six times more power-efficient than the previous generation of Wi-Fi chips. The company will provide both standalone chips with 5G Wi-Fi and combo chips with Bluetooth capability.
These types of chips will be used in 50% of total wireless integrated circuits by the end of 2014. Broadcom is the first company to offer 5G Wi-Fi technology across all platforms. The Wi-Fi, Bluetooth, and GPS combo chips together contribute to 25% of Broadcom's total revenue. The company expects to generate total revenue of $8.58 billion this year and $9.35 billion next year, up from $8 billion last year.
Snapdragon 400 processor and 3G subscriber growth in China
On June 4, 2013, Qualcomm (NASDAQ: QCOM) announced that its wholly owned subsidiary, Qualcomm Technologies, is offering a new Snapdragon 400 processor chip. This processor can be used in both 3G and 4G LTE networks. This processor will help Qualcomm capture the low-cost smartphone market in China and other emerging markets. The chip will be available by end of this year.
The company dominates the smartphone processor market with 43% of market share. With the growing demand for smartphones, total revenue of the company is expected to rise to $24.36 billion this year and $26.72 billion next year, compared to $19.12 billion last year.
Strong 3G subscriber growth in China will benefit Qualcomm's licensing business. Sale of subscriber equipment by Qualcomm licensees generates more than 90% of patent licensing royalty revenue. Chinese wireless carriers China Mobile, China Unicom, and China Telecom combined reported an addition of 16.5 million 3G subscribers in May 2013. Currently, 3G represent 26.6% of China’s total market.
Looking at subscriber growth in China, Qualcomm should increase its TD-SCDMA subscriber share with its Qualcomm Reference Design, or QRD program. TD-SCDMA is a 3G standard for mobile telecommunication in China. The company will benefit from strong growth trends of 3G in China through increased royalties and licensing revenue. The licensing and royalty revenue are expected to rise $7.78 billion this year and $8.60 billion next year, compared with $6.65 billion last year.
Strong order demand and closure of facilities
Texas Instruments’ (NASDAQ: TXN), or TI's, product demand has increased due to the company having a shorter lead-time than its competitors. It had book-to-bill ratio of above one in the first quarter ending March 2013, which indicates the company’s strong order demand. The book-to-bill ratio measures orders received against units shipped and billed.
The majority of the company's end markets are performing well, where industrial order demand is showing positive trends, particularly in high performance Analog and Silicon Valley analog products, as well as in embedded processing. Automotive is also showing strength because of catalog and application-specific integrated circuits. The communication infrastructure market is improving in North America with some improvement in China, but demand for semiconductors used in PC and consumer devices like gaming consoles remains weak.
With order growth across various end markets and growing customer strength, TI can expect revenue growth in its analog and embedded business segments. These segments contribute around 77% of the company's total revenue. The analog segment revenue is expected to rise to $7.14 billion in 2013 and $7.65 billion in 2014, compared with $7 billion in 2012, whereas the embedded processing segment revenue is expected to rise to $2.28 billion in 2013 and $2.4 billion in 2014, up from $2 billion in 2012.
In 2012, TI announced that it will close two older semiconductor manufacturing facilities in Hiji, Japan, and Houston, Texas. These sites are 30 years old, and now require significant upgrades to keep operating. It is financially viable to shift production from these sites to more advanced facilities in Texas rather than upgrading. These sites are expected to close by the end of the second quarter of this year, and should generate annual savings of $100 million.
Broadcom's baseband chip, BCM23550, and extension of its 5G Wi-Fi technology to connected homes should drive revenue and strengthen its market position.
Qualcomm's launch of the new Snapdragon 400 and 3G subscriber growth in China provides better prospects for future growth.
Texas Instruments' strong order demand across end markets should improve revenue and the closure of old facilities is expected to generate savings.
All three of these stocks look like buys.
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Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!