Zacks Industry Outlook Highlights: Micron Technology, NVIDIA, Hewlett-Packard and Cree

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Sep 18, 2014, 09:30 ET

CHICAGO, Sept. 18, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Semiconductors, including Micron Technology (Nasdaq:MU-Free Report), NVIDIA Corp (Nasdaq:NVDA-Free Report), Hewlett-Packard (NYSE:HPQ-Free Report) and Cree Inc. (Nasdaq:CREE-Free Report).

Industry: Semiconductors

Link: http://www.zacks.com/commentary/34431/semiconductors-remain-key-for-iot

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 on, 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.

Forecast for 2014

According to World Semiconductor Trade Statistics (WSTS) data, there should be positive worldwide semiconductor sales growth of 6.5% in 2014 (previous 4.1%), followed by 3.3% growth in 2015 (previous 3.4%). Asia, Europe and the Americas will grow 9.3%, 7.9% and 2.1%, respectively. Japan is will be down 1.3%. The SIA didn't provide an end-market wise update. It previously expected growth across markets in both years, although wireless and automotive were expected to grow the strongest with consumer and computing staying relatively stable.

Major Players

The major players in the industry may be categorized into chipmakers (OEMs -- whether fabless or otherwise), equipment and material suppliers, and foundries. The market positions described below refer to latest available data.

Earnings Trends

The broader Technology sector, of which Semiconductors constitute a part, did quite well in the second quarter. Both the revenue beat ratio of 58.5% and earnings beat ratio of 58.5% were solid. While the revenue beat ratio was similar to the average for the S&P 500, the earnings beat ratio was lower. This is likely because of the increasing competition and corresponding price pressures across the sector as well as the fact that many technology companies are in investment mode.

Total earnings for the sector were up 12.3% year over year, compared to an increase of 4.7% in the first quarter of 2014. Total revenues were up 6.1% from last year compared to a 3.1% increase in the first quarter.

Technology sector earnings are expected to be up 10.8% in 2014 and 12.0% in 2015. Revenues are expected to grow 4.4% and 6.0%, respectively.

OPPORTUNITIES

Some of the best opportunities in the semiconductor industry are the memory players Micron Technology (Nasdaq:MU-Free Report) and NVIDIA Corp (Nasdaq:NVDA-Free Report).

Micron will benefit from the growth of mobile devices, both smartphones and tablets. These devices are big consumers of memory (both DRAM and NAND), which increase demand for memory makers. At the same time, the industry is capacity constrained, which makes for stronger pricing. It has also increased focus on new technologies like SSDs, which along with integrated security will enable it to target the enterprise segment.

NVIDIA's prospects are being driven by strong uptake of its Tegra K1 processor. Some of the more significant wins include Hewlett-Packard (NYSE:HPQ-Free Report) and the largest Chinese mobile device maker Xiaomi. Tegra K1 was also selected to power Google's Project Tango tablet development kit. The company also packs its graphics processing power (along with software) into a product called Tesla that is very popular as an accelerator in high performance computing (HPC) environments. Its arrangement with ARM is potentially a threat to Intel's progress in this segment.

WEAKNESSES

There are some major weaknesses at the moment, but a company worth highlighting is Cree Inc. (Nasdaq:CREE-Free Report) The company is a developer of LED technology, which is a pretty hot market right now. But with LED backlighting becoming more mainstream, competition from several Asian companies like Samsung increased.

Cree was unable to sustain prices and margins, backing off totally into lighting. But here it is up against even more competition from established players like Phillips. So it has to resort to aggressive pricing and heavy discounts, which are impacting its profitability even as revenue increases. Analysts have been lowering estimates for Cree leading to increased cautious about the shares.

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