WSJ Article:
August 25, 1999
After Chip-Stock Run, 'Niche' Is the Word
By Carolyn Whelan
After languishing earlier this year, semiconductor stocks are hot again as PC
demand picks up big time. Since the beginning of 1999, Intel stock has risen
37%, Texas Instruments has soared 82% and Micron Technologies has
gained 38%.
But as the big names have taken off, investors have begun
looking at specialized chips for niche markets like cellular
phones, data networking and 'convergence' devices.
Though some leading names in those areas, like Broadcom
and PMC Sierra, have moved up smartly, some pros say lesser-known stocks
like Atmel, RF Micro Devices, Applied Micro Circuits and Conexant Systems
have a lot of mileage left.
Cellular telephony is one of the hottest markets around. Unit shipments of
wireless handsets in the U.S. are expected to more than double to 71.4 million
in 2003 from 28.6 million in 1998, according to the International Data
Corporation.
That's why "bookings on flash [memory chips] have been phenomenal," says
Sudeep Balain, a research analyst at Soundview Technology Group. Flash
memory registers the program code of a microcontroller in PCs, digital
cameras and handsets.
Stellar handset sales bode particularly well for Atmel, which has a market
capitalization of $4 billion. Around 40% of its revenues stems from cell phones
for the likes of Nokia and Motorola, according to Balain, who rates the stock
a Strong Buy. Atmel also makes chips for consumer electronics, cars, PCs
and peripherals, which are also seeing strong demand.
Another specialty chip maker, which is "90% wireless," according to Pete
Peterson, an analyst at Volpe Brown Whelan, is RF Micro Devices.
RF Micro makes power amplifiers (for
wireless devices like phones and
security systems) that, like microphones,
blast small signals through antennae.
That means longer battery life,
diminished distortion and lower prices.
"They have the highest-performance
amplifiers at the lowest cost," says
Mark McKechnie, an analyst at Banc of
America Securities .
In fact, around half of the handsets
produced by market leader Nokia have RF's components, making the Finnish
wireless juggernaut its top customer. And, says McKechnie, Motorola and
Ericsson will start using RF's components soon, giving RF "penetration at each
of the Big Three," which command two-thirds of the market.
Another promising area for specialty chip makers is data networking.
Revenues from chips for broadband modems, for example, which provide fast
Internet access through cable or phone lines, are expected to increase
sevenfold to $307 million in 2002, up from $42 million in 1998.
In that area, Applied Micro Circuits (AMCC) makes high-speed chips for
networks that can end up in PCs, TVs, and phones.
Applied Micro, whose market
capitalization is $2.4 billion, is one of the
"high value-added chip [makers] with
very high profit margin on their sales,"
says Brian Salerno, portfolio manager of
the MunderNetNet Fund, who says
Applied Micro is one of his fund's top
20 holdings.
Sandy Harrison, an analyst at Pacific
Growth Equities, likes the company's
soup-to-nuts approach, strong gross
margins and ability to hold the line on prices. He rates AMCC a Strong Buy
and expects "revenues and earnings to accelerate as they move into the
production cycle with some of their customers," which include Lucent
Technologies and Cisco Systems.
Clark Westmount, an analyst at Salomon Smith Barney rates the stock a Buy
with a price target of 110. (It closed Wednesday at 94 3/8.).
One newcomer to watch: Conexant Systems, which has a market
capitalization of $6.6 billion. Conexant was spun off from Rockwell
Semiconductor last fall.
"They've got several new high-growth businesses including chips [for
Asynchronous Transfer Mode (ATM)], Sonet and cable modems," says Joe
Osha, an analyst at Merrill Lynch Global Securities who rates the company a
Long-Term Buy. Other promising areas include wireless, personal imaging and
digital entertainment.
Not surprisingly, these stocks trade at or near their 52-week highs and sell at
premiums to their growth rates. But they're still changing hands at discounts to
those of their high-flying counterparts.
High flyers Broadcom, Vitesse Semiconductor and PMC Sierra, for example,
trade at two to three times their long-term growth rates of 37-50% -- only
marginally higher than these stocks' projected growth. The P/Es of Atmel, RF
Micro, Applied Micro and Conexant are trading at a narrower premium
(1.2x-1.5x) to their projected 2000 and long-term earnings growth rates. And
these are hot stocks in hypergrowth markets.
"A lot of momentum money is finding those hot spots and when that happens
valuation is thrown out the window," explains Dave Bujnowski, an analyst at
Warburg Dillon Reed. "We keep setting target prices and investors keep on
blowing through them."
At Wednesday's closing price of 39 1/8, Atmel trades at 63 times expected
1999 earnings of 62 cents according to First Call, which is a discount to its
estimated 1999 earnings growth of 99%. And its 2000 P/E of 27 times
expected earnings of $1.43 is a hefty discount to its projected 131% earnings
growth rate next year and only slightly more than its estimated long-term
growth rate of 24%. Bujnowski rates Atmel a Buy and has a price target of 45
on the stock.
Similarly, at 45 9/16 on Wednesday, RF Micro Devices' P/E of 82x expected
earnings of 56 cents (for the fiscal year ending in March 2000) is a premium to
its 40% long-term growth rate but a nice discount to its estimated fiscal 2000
earnings growth rate of 113%.
And at Wednesday's closing price of 71 13/16, Conexant changes hands at a
high 59x expected earnings of $1.22 for its fiscal year ending in September
2000 -- a premium to its 25% long-term growth rate but much less than its
122% projected growth rate in fiscal 2000. And its 2001 P/E of 42x expected
earnings of $1.70 is only marginally higher than its 39% estimated earnings
growth rate in 2001.
But of course there are risks. Flash is a commodity. And for Conexant,
keeping up with its growth record and gracefully exiting the 'down and dirty'
analog modem business will be a challenge. And for all of these companies,
thwarting fierce competition is a huge challenge.
But one thing's for sure. Demand for these products isn't going away, and as
long as their sales and earnings are growing nicely, the stocks are likely to do
the same.
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