AMCC's customers are Nortel (largest), Lucent, Cisco, Sycamore, Corvis.... AMCC's chips go in the core of the network. Their revenues are accelerating and their customers businesses are exploding. AMCC may very well grow faster than their customers as their customers move more and more to outsourcing their chip needs - thus giving AMCC even more and more of their business. At a minimum AMCC should grow as quickly as the optics build-out. Probably quicker. AMCC is also on its way to becoming the King of OC-192 (the next leap forward in optics speed).
In regard to sustainable advantage, in AMCC's market contracts are often won years in advance, and vendors stick with their suppliers as a very close working relationship is developed. Meaning that there is a very high degree of visibility. Product cycles are generally measured in years meaning very low chip vendor turnover. In regards to proprietary barriers AMCC is the expert in SiGe chips with proprietary barriers to its design and construction. Some of this IP is on license from IBM (not sure if exclusive license in this respect) the rest is internal IP and expertise.
The beauty of SiGe is it is disruptive to GaAs (the material which is competitive in the core to SiGe and which the slower growing Vitesse specializes in). It is disruptive in offering equal to nearly equal performance as GaAs but at much lower cost and much easier to work with. Similar to the disruption of CREE Sic vs. sapphire and NAS vs. SAN.
Indeed AMCC is not a Gorilla lock, but neither is BRCM (or is BRCM?, I'm working on report) nor PMCS. Yet these three companies are the Big 3 when it comes to broadband chip production. They each dominate their markets. BRCM at the edge, PMCS at the inner edge and AMCC at the core. Part of this domination comes from the truly hyper-growth and lack of expertise in these markets. But whichever the case, as long as the markets stay in hyper-growth these are the 3 dominate players in broadband silicon solutions.
So to answer your question AMCC is one of the premiere providers of broadband chips. It is the premier supplier in the core, and looks as if it will dominate OC-192 as this product begins its roll-out.
The opportunity for AMCC arises because Nortel business will slow down to 10% sequential growth over the next Q or 2 due to the product transition from OC-48 to OC-192. This transition entails using the remainder of custom OC-48 ASICS (which must be used from inventory) vs. the less custom chips needed for OC-192. AMCC's other customers are growing at 30% sequentially. The book-to-bill ratio last Q was 1.4 to 1 (3 to 1 if you exclude Nortel and 1 to 1 with Nortel for this abberrtional product transition period).
A check at the financials of AMCC shows all areas ramping from gross margins growing to well over 70% and still growing to net margins climbing very nicely every Q. Billion in cash on the books (alright $900 some million).
In conclusion they dominate their market, their market is in hyper-growth and accelerating, they have a very strong sustainable advantage, and their stock got dumped over the temporary Nortel situation. A dumping not consistent with the underlying and accelerating (in all metric) fundamentals of AMCC.
So I would not call them a Gorilla, but I would call them one of the finest chip companies, in perhaps the fastest growing market of any chip company in the world, and with one of the best competitive positioning of any chip company in the world. At least over the next year or two or three.
In my book this qualifies as a disciplined and very compelling purchase. This is no LHSP.
Tinker |
