Zacks Industry Outlook Highlights: Intel, ARM Holdings, STMicroelectronics, Qualcomm and Texas Instruments

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May 21, 2014, 09:30 ET

CHICAGO, May 21, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Semiconductors, including Intel Corp (Nasdaq:INTC-Free Report), ARM Holdings (Nasdaq:ARMH-Free Report), STMicroelectronics (NYSE:STM-Free Report), Qualcomm (Nasdaq:QCOM-Free Report) and Texas Instruments (Nasdaq:TXN-Free Report).

Industry: Semiconductors

Link: http://www.zacks.com/commentary/32648/semi-plays-for-the-internet-of-things

The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games, and the planes and weapons used to transport or protect us use semiconductor devices.

As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.

The past decade has seen big changes in the industry, with most players streamlining operations and transferring more routine production to low-cost locations. This led to the development of the Asian market, where most memory production and backend operations have shifted.

However, since innovation remains largely within the country, the sector is one of the biggest employers of labor, with a corresponding significant impact on the overall economy.

Semiconductors and the Internet of Things

As one of the leading enablers of technological progress, semiconductors are expected to play a key role in the growing interconnectedness of things. Two factors have driven this change. The first is the advent of the cloud that has made it feasible to store very large amounts of data to be transmitted to and received on wired or wireless devices. The second is the continued reduction in the cost of manufacturing semiconductors that makes it feasible to install them on a range of everyday devices that were previously unconnected.

In its Internet of Things (IoT) 2013 to 2020 Market Analysis report, IDC estimates that spending on IoT technology and services will touch $8.9 trillion by 2020, or a 7.9% CAGR. IDC's estimates continue to rise, given the growing enthusiasm for IoT and its growing prospects. This should generate demand for billions of semiconductors.

Intel Corp (Nasdaq:INTC-Free Report) has promised to become a leading supplier of components and services for IoT and leading European producers, such as ARM Holdings (Nasdaq:ARMH-Free Report), Infineon and STMicroelectronics (NYSE:STM-Free Report) have asked the European Commission to set up research centers dedicated to IoT. Many other players will undoubtedly join the party.

Traditional Markets

The consumer and computing markets remain the most important traditional markets, but because of the gradual convergence of functionalities, it is growing increasingly difficult to identify which devices are computing and with which consumer. Semiconductors are spurring this change, facilitating the convergence.

PC market growth will be moderate in the next few years, more than made up by growth in mobile devices. A lot of the growth in the next few years will come from price-sensitive emerging markets, which is an added negative. Innovation in the mobile segment will be focused on improving functionality and experience by getting semiconductors to operate at higher speeds and by consuming less power.

ARM is a significant beneficiary of the trend favoring mobile computing, since its simpler processor architecture consumes less power. As a result, companies like Qualcomm (Nasdaq:QCOM-Free Report), Texas Instruments (Nasdaq:TXN-Free Report) and others have based their products on ARM cores. Intel appears to have fallen behind in the race, but 2014 could see a reversal in its fortunes.

At the same time, dumber terminals mean increasing demand for cloud services, which is pushing demand for servers and data centers and thereby helping Intel, which is the dominant player in the segment. While ARM is likely to enter this turf just like Intel is entering mobile, Intel remains very strongly positioned here.

Other than tablets, the consumer electronics market also includes gadgets like LCD TVs, Blu-ray players and smartphones.

The Consumer Electronics Association ("CEA") expects U.S. consumer electronics sales to be up 2.4% this year, following a sharp drop-off in 2013. The CEA expects global spending on technology to decline 1% this year to $1.06 trillion.

However, spending on tablets and smartphones is expected to remain strong at roughly 43% of all tech spending. Smartphone prices will take a tumble however. The new category of smartwatches will do around 1.5 million units. HD TVs, while remaining a very small percentage of total TV units, will grow from 60K units to 485K units.

The wireless infrastructure segment of the communications market has been stronger than the wireline segment in the last few years. This segment is expected to remain consistent with 2013 levels, as transition to 3G and 4G infrastructure continues. Increasing data volumes across the world and infrastructure build-outs to support these volumes and deal with connectivity issues (network congestion, power reliability, privacy and security) will continue to drive semiconductor sales.

In addition, enterprise and data center networks are undergoing a huge change because of greater demand for data storage, security and privacy (cloud computing, IoT). This should generate significant demand for semiconductors over the next few years.

New concepts like software defined networking (SDN) are based on more intelligent network control and are therefore new markets for semiconductors. Spending on smart grids and intelligent metering applications is expected to see particularly strong growth (19% CAGR through 2016 according to IC Insights).

The automotive end-market has been growing in importance, as the consumption of electronic components for safety, infotainment, navigation and fuel efficiency continues to increase. As a result, semiconductors serving this market should grow stronger than the industry over the next few years.

Industrial consumption of semiconductors is linked to GDP growth, which according to the UN economic growth forecast for 2014 is not too exciting. The GDPs of the U.S., Western Europe and Japan are expected to grow 2.5%, 1.5% and 1.5%, respectively.

Emerging economies like Brazil, Russia, India, China and Africa are expected to grow 3%, 2.9%, 5%, 7.5% and 4.7%, respectively. Medical Devices (normally included in this segment), lighting solutions and residential construction markets are likely to be stronger. As a result, semiconductor devices that have enabled increased automation and efficiencies are likely to see modest demand.

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) is looking up. Production increases should be slightly positive for the semiconductor industry this year.

Defense spending remains uncertain, although electronic weaponry, intelligence systems and basic weaponry remain important. So semiconductor manufacturers serving this market likely continue to see mixed results, depending on the customers served.

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