In my last post, I introduced Intel and the markets they are in and are trying to get into. In this post I want to provide a brief intro to others in the semiconductor industry that are (but not necessarily) competitors. Here are 4 that I will provide a brief intro to today: 1) Nvidia 2) MIPS Technologies 3) Analog Devices and 4) Taiwan Semiconductor.
Nvidia
Nvidia is what is known as a fabless semiconductor company (like most others today). They design chips for specific uses and then outsource their manufacture. In this case, Nvidia is primarily known as a graphics chip company, making processors for high performance gaming systems and supercomputers.
Most recently though, Nvidia is licensing ARM cores and making a push into the smartphone and tablet space with their Tegra line of processors. Most recently they have been demo-ing high performance tablets with dual core ARM CPU’s and quad-core Nvidia GPU’s.
Nvidia is a gaming company and I expect them to keep their focus on the high end of the market with their entry into mobile computing. But given their footprint in the supercomputer market, this could mean they become a real threat in the high-end PC and server markets. Some recent products that Nvidia’s chips are ending up in: Motorolla Droid X2, Motorolla XOOM tablet, Samsung Galaxy 10.1 tablet.
They outsource manufacturing to Taiwan Semiconductor (TSMC). TSMC is the behemoth in the foundry space and has clients like Qualcomm and Broadcomm as you’ll see below.
Compared to Intel, for now at least, Nvidia has much lower net profit margins of 7-15% with losses in 2009. Comparatively, Intel was able to maintain net profit margins of 15-25% throughout the economic stress of the last 3 years. Right now, they are selling at a forward P/E of about 14 and not paying a dividend. This is probably close enough to fair value that I’m not going to dig into them further.
MIPS Technologies
MIPS is the closest direct competitor to ARM Holdings in the market today. The two have been going head-to-head in semiconductor IP since the late 1990′s. For the time being, ARM has won this battle by becoming the dominant player in the mobile devices space while MIPS is dominant in the more mature segments of the chip market like digital cameras, cable boxes, gaming systems, and networking equipment. MIPS also has a big presence in the automotive market, which is growing.
Like everyone else, MIPS is also trying to enter the mobile devices space. They have most recently released chips that will run Android on a smartphone platform. In 2011, a few low-end smartphone and tablets using MIPS cores were released. All of this additional competition in the mobile devices market is only bad for ARM as the defendant but good for consumers.
Financially, MIPS is in a very strong position with 30% of their net value in cash and no debt. But some of this cash is from what looks like a recent stock issuance. I suspect the stock issuance was made to fund a big push into the mobile devices market. We will see how this works out.
On the other hand, MIPS has seen a lot of change at the top hiring both a new CEO, Sandeep Vij, and a new head of Engineering, Ravi Krishna, in 2010 and then additional a new head of Corporate Strategy, Dave Singhal, just this year.
While MIPS is selling at a low P/E of ~10 (net of cash) I see them as more of a speculative position. If they make inroads into the smartphone market, they will likely grow revenues at a fast clip and the stock price should rise and earn a higher P/E multiple as well. On the other hand, they have been somewhat stagnant for some time so their success is no guarantee with all the changes going on inside.
Analog Devices
Analog Devices specializes in making chips that convert real-world (analog) signals into digital signals that microprocessors can then use. Examples of uses range from sensing temperature, to blood pressure, to acceleration, to voice, to wireless communication signals. Given this range of products, ADI is not a competitor of Intel’s but rather a company operating in parallel. Other large signal processing companies include Texas Instruments and Linear Technologies amongst others
A few interesting things about ADI, first they offer tens of thousands of products (chips for different uses) to over 60,000 customers world wide. They are globally diversified with only 20% of revenues coming from the US. Most of their products are used in industrial (building and factory automation), automotive (engine sensors, car infotainment systems, etc…) and medical applications (MRI, x-ray, …). In fact they are leaders in all of these areas.
They operate a similar business model to Texas Instruments, called fab-light. This is where they both contract certain products for manufacturer to outside foundries but also manufacturer some products in house. ADI has a few fabs that they claim are reserved for high margin, critical products while the lower margin stuff is outsourced to, primarily, Taiwan Semiconductor (TSMC). Texas Instruments operates the same way and similarly outsources to TSMC.
One final thing to note is their financials. ADI has a strong balance sheet with over $3bln in cash, are paying a nice dividend of almost 3% yet still trade at a P/E of ~10 (net of cash). This too given that their margins are increasing as volume increases in these growing markets like automotive and medical. While this industry is also very competitive because of rapid technological change, it doesn’t appear to be as fierce as within the digital microprocessor industry. ADI is worth a closer look as a long-term holding.
Taiwan Semiconductor
Finally, I have chosen TSMC for brief review. Again, like ADI, they are not a primary competitor to Intel (and are actually a partner) but they are a big player in the ecosystem that produces ARM core processors for mobile devices and soon PC’s and servers. TSMC is a pure play semiconductor foundry business. This means they manufacturer chips for designers who don’t have the facilities. The reason this business model makes a lot of sense is that semiconductor manufacturing is extremely resource intensive (TSMC is spending $9.5bln on their newest foundry). And more so today than ever as process technologies demand clean rooms that can handle making billions of reliable chips based on transistors that are soon to be as small as 20nm!
At a high level, TSMC is a globally diversified manufacturer of silicon chips for the analog, digital, mixed-signal, and high-power segments. Revenues are diversified by both geography (67% to US fabless designers, 33% to Europe, Asia, Japan, China) and product type (27% computer, 43% communications, 13% consumer, 17% industrial) so they are not subject to the same pressures if the PC industry enters a decline. TSMC is also expanding into developing and making LED’s for lighting and solar panels. They currently have over 450 customers including Apple, Intel, Texas Instruments, Analog Devices, and the entire ecosystem of ARM licensees like Nvidia, Broadcom, and Qualcomm.
One very large risk factor with TSMC is that their customer retention is entirely dependent on them being able to reach each subsequent process node at the same pace as Intel (the current industry leader). If they incur problems or low yields it can affect all of their customers as we saw when they moved to the 40nm process with ATI’s graphics cards. If TSMC falters, this could kill ARM’s technological lead in the mobile processor market (ARM is in a strategic partnership with TSMC to optimize their designs for TSMC’s process technologies). But the opposite is true for Intel, if their process falters, the industry doesn’t have capacity for them to outsource their manufacturing. Manufacturing is just as important in this “space race” to dominate the processor market. But this is also true for fab-lights like ADI and TI. With TSMC’s focus on manufacturing, I would expect them to be the most reliable but it is worth noting this big risk factor as a result of a focused business model.
Financially, TSMC is very healthy with no net debt and trading at a P/E of about 12 while paying a dividend of 3.5%. Even as the industry leader, they have only seen growth (sales and earnings) of about 5% p.a. over the past 5 yrs. This is because the very cyclical semiconductor industry was highly affected by the global financial crisis. But at the same time, it’s an almost certainty that chip usage throughout the world is increasing and will for a long time as emerging markets computerize, autos become more computer driven, and consumer phones/electronics continue to grow and improve. I don’t care to make top-down industry forecasts but TSMC will benefit from the growth of chip usage. One last thing to note, TSMC’s operating margin has shrunk slightly in the last 5 yrs but this is entirely due to an expanding R&D budget. This focus on being the technology leader is what gives me confidence that they will remain an industry leader in the foundry business.
What Next
After reviewing Intel and it’s competitors, the chip manufacturing industry is too competitive for my liking. Intel may very well win the race in which case the stock is almost certainly a bargain right now. And there are plenty of reasons why they could win including their vast resources and their manufacturing leadership. On the other hand, ARM cores could just as easily dominate PC’s and servers in a few generations while continuing to dominate the fast growing mobile devices space. There is too much uncertainty to make a prudent, and confident decision on which company might be a good investment.
Through this look at Intel and it’s competition, I think it is worth taking a closer look at Taiwan Semiconductor and Analog Devices though. Both companies have a lot of potential, though in admitedly competitive markets. Let’s see if either of these are worthy of investment.
In addition, there are a few companies that have been punished by negative press that are worth digging into. They are Cisco Systems, the global leader in communications infrastructure equipment, HP, the PC, server and software company, and finally Research in Motion, famous for it’s Blackberry but hurt because of better products from Apple (iPhone) and Android-based phones. Let’s take a look at these as well.
Comments
What about looking at MSFT?
I will look at MSFT in the next series of posts. I want to look at them compared to others in the software industry including their peers GOOG, AAPL, and ORCL.