Needham & Company on Consumer Semiconductors/Specialty Memory: Favor Secular Growth Stories Over Cyclical Semis in 2012
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Rating Summary:
8 Buy, 2 Hold, 0 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 11 | Down: 13 | New: 17
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Needham & Company on Consumer Semiconductors/Specialty Memory (2011 Recap & 2012 Outlook) - We Favor Secular Growth Stories Over Cyclical Semis in 2012
Analyst, Rajvindra S. Gill, said, "After over two years of uninterrupted stock price appreciation, the Philadelphia Semiconductor Index (SOX) finally retreated, falling 10.5% in 2011. The SOX underperformed the NASADQ and S&P 500 indices, which were down 1.3% and 1.0%, respectively. More specifically, the consumer semiconductor and specialty memory sub-group was hit particularly hard, declining 19% for the year, underperforming the broader SOX and the NASDAQ. A significant portion of that decline resided in semiconductor companies that were exposed to global consumer spending (i.e., Atmel, Silicon Image, Spansion (Nasdaq: CODE), and Trident (Nasdaq: TRID)) or companies that lost market share (OmniVision Technologies) at a key handset customer (Apple (Nasdaq: AAPL)). In 2010, large-cap, cyclical semis underperformed small-mid-cap semis. In 2011, the reverse occurred. Large-cap semis, such as Intel (Nasdaq: INTC) (+15%) and Qualcomm (Nasdaq: QCOM) (N/R) (+10%), significantly outperformed small-cap semis as investors flocked to larger, well-diversified companies in light of a deteriorating macro economy. In 2011, overall industry revenue growth slowed materially to 1% year-overyear (vs. 32% in 2010) as the overall demand environment shrank due to macroeconomic uncertainty, specifically in Europe and U.S. We contend 2012 will mark another slow growth environment plagued by macro and external challenges. Therefore, we favor those companies that are experiencing a multi-year secular growth cycle, in a position to gain share, and experiencing a specific product cycle. Moreover, those companies that are demonstrating moderate to strong top-line growth as well as earnings expansion will represent a small group in semis, a group that we contend investors will be willing to pay a premium given the scarcity of value. For 2012, we recommend stock selection in order to deliver relative outperformance as we continue to prefer the secular stories, such as those with specific revenue share gains, product cycles, or earnings expansion. We believe those investors that continue to invest in the group from a cyclical perspective, as opposed to differentiating specific secular fundamental stories, will likely underperform. Within our coverage universe, we believe the following names are well positioned to capitalize on the aforementioned characteristics: NVIDIA (Nasdaq: NVDA)(Buy) (large cap), Atmel (Nasdaq: ATML)(Buy); Cypress Semiconductor (NYSE: CY)(Buy) (mid-cap); Silicon Motion (Nasdaq: SIMO)(Buy) and Silicon Image (Nasdaq: SIMG)(Buy) (small cap)."
Analyst, Rajvindra S. Gill, said, "After over two years of uninterrupted stock price appreciation, the Philadelphia Semiconductor Index (SOX) finally retreated, falling 10.5% in 2011. The SOX underperformed the NASADQ and S&P 500 indices, which were down 1.3% and 1.0%, respectively. More specifically, the consumer semiconductor and specialty memory sub-group was hit particularly hard, declining 19% for the year, underperforming the broader SOX and the NASDAQ. A significant portion of that decline resided in semiconductor companies that were exposed to global consumer spending (i.e., Atmel, Silicon Image, Spansion (Nasdaq: CODE), and Trident (Nasdaq: TRID)) or companies that lost market share (OmniVision Technologies) at a key handset customer (Apple (Nasdaq: AAPL)). In 2010, large-cap, cyclical semis underperformed small-mid-cap semis. In 2011, the reverse occurred. Large-cap semis, such as Intel (Nasdaq: INTC) (+15%) and Qualcomm (Nasdaq: QCOM) (N/R) (+10%), significantly outperformed small-cap semis as investors flocked to larger, well-diversified companies in light of a deteriorating macro economy. In 2011, overall industry revenue growth slowed materially to 1% year-overyear (vs. 32% in 2010) as the overall demand environment shrank due to macroeconomic uncertainty, specifically in Europe and U.S. We contend 2012 will mark another slow growth environment plagued by macro and external challenges. Therefore, we favor those companies that are experiencing a multi-year secular growth cycle, in a position to gain share, and experiencing a specific product cycle. Moreover, those companies that are demonstrating moderate to strong top-line growth as well as earnings expansion will represent a small group in semis, a group that we contend investors will be willing to pay a premium given the scarcity of value. For 2012, we recommend stock selection in order to deliver relative outperformance as we continue to prefer the secular stories, such as those with specific revenue share gains, product cycles, or earnings expansion. We believe those investors that continue to invest in the group from a cyclical perspective, as opposed to differentiating specific secular fundamental stories, will likely underperform. Within our coverage universe, we believe the following names are well positioned to capitalize on the aforementioned characteristics: NVIDIA (Nasdaq: NVDA)(Buy) (large cap), Atmel (Nasdaq: ATML)(Buy); Cypress Semiconductor (NYSE: CY)(Buy) (mid-cap); Silicon Motion (Nasdaq: SIMO)(Buy) and Silicon Image (Nasdaq: SIMG)(Buy) (small cap)."
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