<font color=red>interesting reading here
06:51am EST 10-Nov-00 UBS Warburg (US) (Wong, David M. 212-713-2649) AMD AHAA M
Semiconductors: Mainline Chip Companies Well Positioned with N... (Part 1 of 2)
Semiconductors UBS Warburg
David Wong, CFA, Ph.D. RESEARCH NOTE
212-713-2649/
Ryl Ashley, Associate Analyst (212-713-2619) November 10, 2000
Sam Lee, Associate Analyst (212-713-3273)
Semiconductors: Mainline Chip Companies Well Positioned with New Products
KEY POINTS
* We believe the near term business environment for companies selling into PC
market, like Intel, AMD and Micron, is relatively soft.
* Micron's DRAM contact prices have continued to drop. We believe contract
prices are currently at $4 to $4.50 per 64 Mb.
* At its analyst day on November 9, AMD talked about some seasonal pick-up in
microprocessor during the last two weeks, from which we conclude the month of
October was relatively weak.
* We believe that AMD and Intel are developing next generation technologies and
product, which could lead to good growth in 2001.
* We are maintaining our Buy ratings on Intel and AMD, and Hold rating on
Micron.
PC CHIP ENVIRONMENT SOFT
From what the AMD management indicated at its analyst day and Micron DRAM
pricing patterns, we believe that the demand for PC related chips such as
microprocessors and DRAMS in October was relatively weak. We think other
sectors of our semiconductor universe offer more investment potential in the
near term. In particular, we believe that wireline chip companies such as AMCC
and TXCC are compelling investment opportunities at this time.
HIGHLIGHTS FROM AMD ANALYST CONFERENCE
AMD reiterated its guidance for the December quarter for revenue to grow in the
high single digit range sequentially. We believe this comprises:
* "Low teen" sequential percentage growth in both flash and microprocessor
revenue
* a decline in legacy revenue
We believe that for the PC Processors division October was a slow month but
sales are beginning to pick up in November. We think flash memory demand
remains strong with AMD's flash ASPs unchanged during the current quarter.
Flash revenue growth is limited by the ability of the AMD/Fujitsu JV to expand
output. Overall, we think there is limited upside to our estimates for
December revenue of $1.3 billion and EPS of $0.67.
For the March 2001 quarter, AMD gave guidance for "high teens" year-over-year
revenue growth. We think this is reasonable, in that it allows a seasonal
decline of a few percentage points of microprocessor revenues.
AMD has indicated that bit growth in the next two years will be 75-80% year-
over-year rather than the 100% per year that we had been assuming. We
understand the lower growth number is due to AMD/Fujitsu JV ability to produce
rather than any weakness in end demand.
AMD presented its product road map for microprocessors:
* AMD indicated the Duron production revenue ramp will not occur until March
quarter of 2001 since the UMA chipset will not be available until that time.
* AMD plans to ramp production of the Palimino, the next generation Athlon, in
March quarter of 2001. A 0.18 micron 1.5 GHz version should be available in
the June quarter, and a 0.13 micron 1.5 GHz version should be available by
the end of the year.
* The company intends to introduce Palimino mobile microprocessors into
production in the March quarter of 2001, and ones operating at over 1 GHz by
the end of 2001.
* AMD plans to introduce desktop and mobile versions of the Morgan, the next
generation Duron, one quarter after similar versions of the Palimino.
* The Hammer family is AMD's eighth generation microprocessor. The Clawhammer
is designed for high-end desktops, and low-end one to two way servers, while
the Sledgehammer is intended for four to eight way high-end servers. The
company plans to introduce the Clawhammer in the December quarter of 2001
with sample production in the following quarter, and the Sledgehammer in the
March quarter of 2002 with sample production in the following quarter.
AMD provided an overview on process technology:
* AMD has demonstrated 0.13 micron process technology with 4 Mb SRAM. Last
month, Intel stated that it has successfully produced P III and 16 Mb SRAM
chips using 0.13 micron process. This is consistent with the AMD strategy of
being slightly behind Intel in intial stages of process development. However
AMD believe it has the ability to transition to new technologies faster than
Intel, after the initial development stage.
* AMD plans to fabricate the Hammer family using 0.13 micron SOI (Silicon on
Insulator) technology in late 2001.
* We believe it is necessary for AMD to migrate to 0.13 micron technology but
view that transitioning to SOI could delay the introduction of the Hammer
family. However, we think that SOI could give performance advantages if the
Company introduces it successfully. Intel does not plan to develop its 0.13
micron technology on SOI.
We view AMD's product and technology roadmap favorably. We think these new
products will be important contributors to revenue over the next few years.
KEY POINTS FROM INTEL'S CONFERENCE CALLS
Intel held two conference calls this week: one on its 0.13 micron technology,
and the other on its mobile processors. We think the 0.13 micron technology is
an important milestone that will allow Intel to produce microprocessors with
substantially higher performance, much greater density, and lower power
consumption.
Important events in the 0.13 micron technology include:
* Demonstrated functional P III processors and 16 Mb SRAMs.
* Chip density of over 100 million transistors.
* Processors operating at multi-GHz speeds.
* Chips operating at 1.3 volts or less for low power.
* Copper interconnect technology for higher speed.
* Four fabs manufacturing using the 0.13 micron process by the end of 2001.
* Introduction of 300 mm fabs with 0.13 micron technology in 2002.
Intel has been segmenting the mobile processor market similar to what it has
done for the desktop market. Intel plans to introduce processors directed to
the full size, thin and light, mini-notebook, and sub-notebook markets.
Significant points to note are:
* Intel recently introduced an 850 MHz mobile microprocessor. By first half of
2001, the company plans to have 1 GHz mobile processors, and other mobile
processor operating at less than one volt.
* Intel plans to offer products in each segment of wireless technologies
including personal area network, local area network, and wide area network.
* Intel intends to introduce 0.13 micron mobile processors in 2001.
We are encouraged by Intel's technology and mobile microprocessor roadmaps. We
believe these are some of the key new products that will drive revenue growth
in the next two years.
UPDATE ON MICRON TECHNOLOGY
We believe that in the last few days, Micron's contract price for 64 Mb has
dropped from above $5 to close to $4, and for 128 Mb it has fallen from $10.50
to $11, to $8 to $9. We believe MU will build inventory in the November
quarter with production bit growth up 5 to 6% sequentially. We think while bit
shipments could be flat to slightly up, the rapid price decline in the current
quarter suggests revenues will decline sequentially and will have a negative
impact on EPS. We now think that Micron's November quarter results might be
below our estimates of $2.3 B in revenue and $0.87 in EPS.
VALUATION
Exhibit 1 shows the P/E and price targets for selected semiconductor companies
in our universe. Although the valuations of INTC, AMD, and MU have come down
considerably in the past months, current valuations are not unusually low
compared with historic levels. We believe that INTC and MU have long term
growth rates of about 15% per year. We think AMD can do better than this
through high growth in flash and microprocessor market share gains. In
contrast, although the wireline chip companies have higher P/E multiples, we
believe all of the ones we currently cover could have achieve growth rate of
over 50% per year for some years yet. Given the huge disparity in growth
rates, we believe AMCC, PMCS, VTSS, BRCM, and TXCC are more compelling
investment opportunities at this moment, and we have Strong Buy ratings on
these stocks.
Exhibit 1: Ratings, Price Targets, and P/E for the Selected Semiconductor
Companies We Follow
Stock Rating Price 12 month CY2001 P/E
Price Est. EPS (CY2001
Target Est.
EPS)
AMCC(1) Strong Buy 63.18 115 0.74 85
BRCM(1) Strong Buy 162.43 300 1.48 110
PMCS(1) Strong Buy 123.25 270 1.82 68
TXCC(1) Strong Buy 40.00 85 0.81 49
VTSS(1) Strong Buy 62.63 200 1.29 49
INTC(1) Buy 41.38 51 1.67 25
AMD Buy 21.00 27 2.50 8.4
MU Hold 32.55 4.53 7.2
Price targets are based on our EPS estimate for the 12 months beginning
approximately 12 months from now (October 2001 to September 2002 for most
companies). Source: Reuters, UBS Warburg
RISKS
06:52am EST 10-Nov-00 UBS Warburg (US) (Wong, David M. 212-713-2649) AMD AHAA M
Semiconductors: Mainline Chip Companies Well Positioned with N... (Part 2 of 2)
Given current market sentiment, there remains a risk that valuations might
continue to contract across the board. For the semiconductor companies that
supply into the PC market, softness in PC sales could result in revenues below
expectations. Furthermore, for the wireline chip companies there is a risk
that general telecom spending could slow, driving chip revenue growth below the
rate we are currently projecting. |
