Print-friendly version
Posted 2/15/99
In a high-tech world
that has not always
been kind to
investors, the plain
probability of more
robust growth for
these lesser-known
chip makers is
enticing.
Sectors & Trends
Bargains still exist in chip sector
Analysts expect "astounding" growth in the communications-chip field and
smaller players such as Vitesse, Level One and PMC-Sierra are poised to
profit.
By Michael Parrish
Think outside the PC box. Think of cellular phones, fax lines, data-transfer
systems, business communications systems -- and all the chips needed to
make those connections. Think about the fact that 80% of all phone calls
today pass along data, not cheery hellos. Think about how many phone and
data lines serve you personally.
Communications chips were once a sideline of the big semiconductor
manufacturers. But as demand for bandwidth grows relentlessly, smaller
companies that have otherwise been making chips for the military and for
such inconspicuous uses as automated test equipment have seen their
fastest revenue jumps in communications -- and most are repositioning
themselves as pure plays. Communications chips has become the
fastest-growing of all semiconductor sectors.
What's the bottom line for investors in Vitesse Semiconductor (VTSS), Level
One Communications (LEVL), Applied Micro Circuits (AMCC), PMC-Sierra
(PMCS) and others? Depending on your choice of industry prophet, the
semiconductor business as a whole should grow a solid 9% to 12% this year.
Predictions for the communications-chip chunk of this, however, run to 30%,
or much more.
"It's astounding the growth that these guys have," says Clark R. Westmont,
communications component analyst at NationsBanc Montgomery Securities.
"The numbers currently in Street expectations for 1999 are still conservative
given the growth rates of the last two years."
David Wong, communications-chip industry analyst at Needham & Co.,
agrees. "The end markets in telecom and datacom are extremely strong,"
says Wong, who dismisses last fall's fears of a weakening telecom market as
a "purely psychological quirk." And Elias Moosa, technology analyst at
BancBoston Robertson Stephens, predicts that similar growth could last for
the next five to 10 years.
These aren't necessarily cheap stocks. Fans pushed share prices up strongly
last year, ahead of the broader semiconductor revival. But in a high-tech world
that has not always been kind to investors, the plain probability of more
robust growth for these lesser-known chip makers is enticing. Despite the
technology downdraft that blew in early February, "most of these stocks have
been pretty strong, and they're currently holding their own," says Doug
Fairclough, investment strategist at ClearStation, the online investment site.
And, even now, there are bargains to be had.
Details
Company Report
1-yr Chart
Recommendations
Vitesse has no debt
Vitesse is a big favorite and it's not hard to see why. The $3.7 billion supplier
to the likes of Cisco Systems (CSCO), IBM (IBM) and Lucent Technologies
(LU) specializes in high-speed gallium arsenide chips, originally in high
demand for supercomputers and now in demand for high-frequency wireless
and fiber-optic communications systems. Gallium arsenide is trickier to deal
with than silicon, but electrons pass through it up to five times faster.
The company's business picture is equally attractive. Unlike many puffed-up
Internet stocks, Vitesse has no debt. Vitesse is also renowned for hitting its
numbers quarter after quarter, and the company celebrated the new year by
announcing a 73% bump in revenues over the same quarter the year before.
Success has not gone unnoticed, however, and a 69 P/E multiple will give
some pause. But Wong and others maintain a "strong buy" rating. "Vitesse is
positioned in some of the very fastest-growing markets in telecom and
datacom," says Wong. "I think they're one of the best companies in the
group."
Details
Company Report
1-yr Chart
Recommendations
Level One leverages its growth
Wong also sees a continued gleaming future for Level One Communications,
a Sacramento, Calif.-based creator of high-speed silicon communications
chips, particularly to send signals down copper wire. Another Level One
admirer is Ken Pearlman, senior semiconductor analyst at CIBC
Oppenheimer & Co.
The company proves that while gallium arsenide chips are terrific for some
communications uses, there's still a big need for sophisticated silicon
semiconductors. The company has been growing at a very pretty rate, year
after year.
"Basically, we've got a 40% to 60% grower here," says Pearlman, "and if the
stock gets a 40 to 45 (price-to-earnings) multiple, that's probably not
outrageous." (The forward P/E ratio for 1999 is about 29.) "You've got a
company that's been doing this for quite a while," says Pearlman, "and
they're very mature. They've been able to understand how to leverage their
growth."
Details
Company Report
1-yr Chart
Recommendations
PMC-Sierra stock has soared
Also take a look at PMC-Sierra, the $2.4 billion Vancouver, British
Columbia-based chip designer (it outsources manufacturing). Considering that
since October it's boomed from a $26 stock to more than $80, its forward P/E
of about 54 seems almost reasonable. "They're probably the best-positioned
company in this space," says Moosa. "They probably have the strongest
product portfolio, the deepest relationships with the OEMs (original equipment
manufacturers), and the strongest market-share position in most of the
markets they compete in."
As Wong notes, PMC-Sierra also has received an unexpected break recently
from the quicker-than-expected erosion of its less-profitable legacy business,
which will now do less to crimp the company's top line. The big bucks are in
the communications side. Westmont agrees that the communications
business is where PMC-Sierra scores particularly well, with more than 80%
gross profit margins. "That's just unheard of," says Westmont. "It's amazing."
Details
Company Report
1-yr Chart
Recommendations
Applied Micro Circuits is pricey for now
A big claim to fame for another company, Applied Micro Circuits, is its
leadership, says Westmont: "AMCC's management team is one of the best."
Westmont also expects the company's 30% current growth rate to increase
as its focus shifts from military and testing to communications; Applied Micro
Circuits, he believes, is about where Vitesse was a couple of years ago in
this transition.
On the other hand, Wong expects that a recent military contract from
Raytheon in the near term actually will help Applied Micro Circuits' efforts to
keep revenues on track. This end-of-line order -- the last time Applied Micro
Circuits will be producing these military goods -- has a flexible delivery
schedule. So Applied Micro Circuits can increase or slow production to make
sure it meets its financial targets from quarter to quarter. Applied Micro
Circuits' drawback? Only its popularity. The stock price has tripled since
October, which makes it a bit pricey for the moment.
Details
Company Report
1-yr Chart
Recommendations
Galileo is 'on a roll'
Bargain hunters may be more easily drawn to Galileo Technology (GALTF), a
$444 million Israel-based company whose stock has yet to return fully to
former glory. Last summer, investors were dismayed when it looked like
Galileo had muffed a transition to marketing a faster chip. The stock tanked.
Rallying this fall and winter, it took a lesser hit in January when momentum
investors panicked about a new-product introduction. But Wong believes it's
"actually on a roll," though investors don't yet realize it. He has a "strong buy"
rating on the stock, and a target of $35 on shares currently selling at about
$20. Galileo's P/E ratio is just 29, cheap for the sector.
Do you happen to be attracted to the 6100 series Nokia cell phone? RF Micro
Devices (RFMD) supplies the power amps. The company is especially strong
in gallium arsenide integrated circuits, which means it is atop the wave in
cell-phone development, according to Dale R. Pfau, wireless technology
analyst at CIBC Oppenheimer & Co. The higher the frequency, the more
attractive gallium arsenide becomes to manufacturers.
"Anytime you see the frequency going up and the bandwidth requirements
going up, there's an opportunity for gallium arsenide," says Pfau. He predicts
that RF Micro Devices and Alpha Industries (AHAA), another hard-charging
gallium arsenide shop, will continue to benefit from demand growth in
wireless. Pfau has "strong buy" ratings on both. Fairclough cites RF Micro
Devices and PMC-Sierra as the strongest relative performers in the sector
during the tech retrenchment.
TranSwitch (TXCC), a $570 million chip designer in Connecticut (another in
the sector that outsources production), is focused on wide-area network
manufacturers. "The stock's been a champ," says Westmont, who along with
other sector-watchers still expects price growth -- though TranSwitch has
tripled since last fall. Other companies worth watching as communications
connections bloom include Micro Linear (MLIN), TriQuint Semiconductor
(TQNT) and MMC Networks (MMCN).
Sectors and
Trends
Recent articles:
• Battered offshore drillers
could strike it rich by Clint
Willis, 2/8/99
• To keep money coming in,
they send the payroll out by
Tricia Serju-Harris, 2/1/99
• 3 ski resort companies get
lift from new businesses by
Mark Thompson, 1/18/99
more...
Turnaround predicted for Anadigics
Expect more investment opportunity as time goes on. Tiny $240 million
Anadigics (ANAD), for instance, is not currently admired by many observers.
But according to Wong, Anadigics has "some very good things happening
which are not going to percolate to the surface for a bit." Anadigics has had
its problems, including shareholder lawsuits and painful staff cutbacks. But a
change of command has brought a needed change in fabrication plants,
according to Wong, which will bring streamlining and profit not far down the
road. Wong, who rates Anadigics as a "buy," sees the turnaround in the last
half of this year.
Finally, investigate the freshest face among these companies, $8 billion
Broadcom (BRCM), which has received enormous attention particularly since
it went public with a bang last April. Broadcom is admired by techies for its
success with systems-on-a-chip, and it dominates the hot markets for set-top
boxes and cable modems. Investors couldn't help note a 450% growth in
revenue in 1998, a rate that will undoubtedly slow.
Broadcom's stock price has been volatile of late, however. Some analysts
have backed off to hold positions at the moment, because of its current high
valuation -- a multiple of more than 160, high even for its peers. "I have no idea
where Broadcom's stock price is going," admits Wong. Get out your crystal
ball, but do it fast.
Links
Discuss It
E-mail Michael Parrish
E-mail the Editors
Product Support
Top
Terms of Use, and Privacy Policy. © 1996-1999 Microsoft Corporation and/or its suppliers. All
rights reserved.
Investor's editorial goal is to provide a forum for investment ideas. Our articles, columns, and
other features should not be construed as investment advice, nor does their appearance imply
an endorsement by Microsoft of any specific security or trading strategy. An investor's best course
of action must be based on individual circumstances.
|
