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 (Nasdaq: ARMH), with its power-efficient low-performance chip architecture that dominates the growing mobile phone and tablet markets. Others would be Qualcomm, Samsung and Texas Instruments. As such, we remain relatively positive about these companies in 2011.
We are also optimistic about Intel (Nasdaq: INTC) and Advanced Micro Devices (NYSE: AMD), given their focus on the data center segment. Although we are a wee bit cautious on Intel's other growth initiatives and believe that execution will be key to delivering on its plans with the two big acquisitions, 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. These advantages are not lost on U.S. players, so the number of companies entering the market is on the rise.
Our favorites in this area include Texas Instruments (NYSE: TXN) and Analog Devices (NYSE: ADI).
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