Jefferies & Co. recommends semiconductors' stock selection for 2011 in order to deliver relative outperformance as it continues to prefer the secular stories such as those with specific revenue share gains, product cycles, or new business ramps.
We believe those investors that continue to invest in the semiconductors group from a cyclical perspective, as opposed to differentiating specific secular fundamental stories, will likely underperform, said Adam Benjamin, an analyst at Jefferies.
In large cap, Benjamin's favorite semiconductors stocks are: Broadcom, Marvell Technology Group, and Qualcomm. In mid cap, Benjamin's favorite semiconductors stocks are: Cavium Networks, Cypress Semiconductor, and NetLogic Microsystems. In small cap, Benjamin's favorite semiconductors stocks are: Cirrus Logic, Inphi, and Volterra Semiconductor.
Large Cap: Broadcom Corp. (BRCM)
Broadcom remains well positioned for revenue growth in 2011 and beyond given its comprehensive communications, integrated connectivity portfolio and large cellular baseband ramp, while its commitment to its financial model will drive significant profitability.
Benjamin said Broadcom is largest beneficiary of increasing connectivity in handsets. Broadcom is the leader in combos with 100 percent of the share at Apple Inc. (AAPL) and HTC, and dominant share at Samsung, LG, and Motorola. Benjamin said Nokia Corp. (NOK) is the largest opportunity for Broadcom as checks suggest Broadcom has secured the majority of the WLAN designs going forward at the expense of Texas Instruments Inc. (TXN).
Benjamin expects Broadcom to continue to ramp EDGE (Enhanced Data rates for GSM Evolution) and low-end 3G models at Samsung and likely move into higher-end 3G models in 2H11 with the launch of its nexgen 3G modem (expected at 2011 Mobile World Congress to be held February 14 to 17 , in Barcelona, Spain). Benjamin expects VideoCore revenue to increase to about $150 million in 2011 (from $40 million in 2010) driven by the Nokia N8, C6, C7, and E7 models.
Broadcom continues to buy technology leaders -- Dune (Ethernet switch fabric), Beceem (WiMAX), Percello (Femtocells), Gigle (Powerline), Teknovus (PON), Innovision (NFC) -- which accelerate future revenue growth drivers and at the same time strategically keeps or increases Broadcom’s competitive advantage. While still small in revenue today, we believe all of these recent acquisitions will materially add to revenue over the next couple years, said Benjamin.
Large Cap: Marvell Technology Group Ltd. (MRVL)
We believe Marvell is well positioned with multiple growth drivers for 2011 to include the ramp of Seagate and Hitachi HDD (Hard Disk Drive) design wins, share gains at RIM and potentially Samsung and LG, and connectivity and app processor wins in gaming, printers, e-readers, tablets, and handsets, said Benjamin.
Benjamin said HDD sentiment is super low but likely still a growth business. Benjamin believes Marvell’s storage business can still grow as Hitachi (started second quarter of 2010) and Seagate (2011) ramps add $200 million to $250 million incremental revenue in 2011 and 2012 and checks suggest Marvell is securing a higher percentage of solid-state drive (SSD) wins than their HDD share (60 percent).
Marvell's content in tablets is 4 to 5 times that of HDDs ($3.50 to $4.00 for HDD system-on-a-chip (SoC) and $15 to $20 in tablets – apps, combo, SSD controller) so even a small share in tablets offsets the lost HDD revenue. Marvell’s share at RIM recently hit about 70 percent but this business still grows year over year as Marvell entered 2010 at only 30 percent to 35 percent share (even if RIM’s units don’t grow).
Benjamin said Marvell has a global 3G platform win at Samsung (1GHz comms processor and 8787 WLAN/Bluetooth/FM combo) as well as a smaller platform at LG. Additionally, the OPhone ramp disappointed but checks indicate 10 million units is possible in 2011 as China Mobile repositions product to the lower-end. Benjamin expects Marvell has incremental WLAN (Wireless Local Area Network) and apps processors opportunities.
Large Cap: Qualcomm Inc. (QCOM)
We recommend investors buy shares as we believe Qualcomm is the most significant beneficiary of the upgrade to 3G/4G from a license perspective and its dominant product roadmap well positions its chip business to take advantage of the mix shift to high end processor intensive handsets, said Benjamin.
Qualcomm was shown up at the International Consumer Electronics Show as NVIDIA stole the dual-core thunder but Benjamin still believes integrated solutions will drive a competitive advantage and expect Qualcomm's Snapdragon to start ramping its 1.2Ghz dual-core solution soon with its 1.5Ghz dual-core out by second half of 2011.
Benjamin said Qualcomm's transition to 3G/4G will continue to drive license revenue. Benjamin expects Qualcomm to see significant traction in the second wave of tablet wins in second half of 2011 as it now has a dual-core solution available and are the only supplier with an integrated app processor and baseband.
The acquisition of Atheros immediately solved Qualcomm’s connectivity hole, specifically WLAN. The existing Atheros reference design already yielded a significant amount of design wins, but as part of Qualcomm Benjamin believes the attach rate can be significantly higher as Qualcomm makes this more of a complete portfolio sale (its strength).
Mid Cap: Cavium Networks, Inc. (CAVM)
Benjamin recommends buying shares of Cavium as it is positioned for a significant multi-year revenue ramp fueled by its strong backlog of design wins (more than $500 million annual revenue run rate), which he expects to continue to expand as the market moves to multi-core (from single-core) processors.
Mid Cap: Cypress Semiconductor Corp. (CY)
Benjamin believes Cypress is well positioned to benefit from a number of secular drivers to include: touchscreen controllers, SRAM (Static Random Access Memory) margin improvement, optical navigation systems and trackpads, and power PSoC (Programmable System-on-Chip) and LED lighting, which he expects to drive strong revenue growth, higher gross margin, and solid earnings.
Mid Cap: NetLogic Microsystems Inc. (NETL)
We recommend investors buy NetLogic shares as it is well positioned for long-term growth due to ramps into numerous new products at Cisco and non-Cisco customers driven in part by wireless infrastructure upgrades and IPv6 (Internet Protocol version 6) while facing little competition, as well as benefiting from a shift to multi-core processors and other incremental revenue opportunities, said Benjamin.
Small Cap: Cirrus Logic Inc. (CRUS)
Benjamin believes Cirrus Logic is well positioned to maintain its share at its largest customer with increasing ASPs driven by higher integration and also has incremental opportunities with emerging products such as audio codecs in non-Apple smartphones, smart meters, LED lighting, and PFC (Power Factor Correction).
Benjamin said his confidence has increased that Cirrus has secured wins at Apple in the upcoming CDMA iPhone, iPad 2, iPhone 5 and iPod Touch (5th generation). More importantly, Benjamin believes Cirrus continues to integrate additional external components and features that allow for increasing ASPs.
Small Cap: Inphi Corp. (IPHI)
Benjamin believes Inphi is well positioned for revenue and earnings growth driven by data center and network infrastructure exposure with: a memory upgrade cycle driven by the ramp of LRDIMM (Load Reduced Dual In-Line Memory Modules) with Intel's Romley server platform, and the upgrade of core networks to higher 40/100G bandwidths from 10G.
Small Cap: Volterra Semiconductor Corp. (VLTR)
We recommend investors buy shares as Volterra is well positioned to see significant revenue growth with its unique integrated voltage regulators (versus discrete) driven by a narrowing price/performance gap, material share gains in servers, specifically at Hewlett-Packard Co. (HPQ), and continued adoption in notebooks, said Benjamin.