With growing demand for smartphones and tablets, chipmakers providing the circuits for these technologies should considerably benefit. Cypress Semiconductor Corporation (NASDAQ:CY), Broadcom Corporation (NASDAQ:BRCM) and Applied Materials, Inc. (NASDAQ:AMAT) are three companies that are particularly strong in this area of the semiconductor industry and are, therefore, worth our attention –and money-. Let’s take a closer look at them:
Cypress: A leadership position
For starters, the book to bill ratio has surpassed 1, evidence the firm has demand visibility. Cypress is particularly boosted by demand in the Chinese and wider Asian market, which provided 64% of 2012´s revenue. Increasing demand of TrueTouch and CapSense technologies will certainly drive growth in the short term. In line with these projections, bolstered by seasonality and new customer ramps in Programmable Systems Division (PSD), management´s guidance for the second quarter looks promising.
The firm mainly owes its success to PSoC (Programmable System-on-Chip) products, which have been delivering strong results. Its contribution to revenue is expected to continue on the back of several important contracts with companies like Toyota.
Cypress Semiconductor Corporation (NASDAQ:CY)’s CapSense system is derived from PSoC technology. This is a market share leading product which includes touch-sensing interface controls, reducing costs by dispensing of more expensive switches.
Cypress Semiconductor Corporation (NASDAQ:CY) also leads the market in the USB Controllers sector, having shipped over one billion devices already. Margins for these products should increase in the upcoming years as fabrication has been moved to India, therefore reducing labor costs.
Although the stock had undergone a little rally after Needham upgraded it to a Buy from Hold, its price fell considerably after Q1 results were announced. Currently trading at a price closer to its 52-week low than to its high, at 24.7 times earnings consensus estimates, if offers a more attractive valuation than the industry median stock, exchanging at 26.31 times consensus earnings estimates (projected assuming a bearish scenario). Nevertheless, its performance last quarter wasn’t as bad as the fall in its stock price made it seem. Earnings came in 200% ahead of consensus estimates, at $0.03 per share. Both earnings and revenue exceeded management’s guidance as well, while dividends paid also topped the average, yielding over 4%. At a reasonable valuation and offering great growth prospects, I’d say, buy Cypress now.
Broadcom: Innovation and growth
This tech giant provides both long and short term investment opportunities as an industry leader. Long-term growth prospects look promising, particularly when you consider that Broadcom Corporation (NASDAQ:BRCM) is a synonym for innovation and excellence, a reputation that the company will most likely continue to hold as engineering efforts to improve efficiency for both the company and its clients continue to deliver positive results.
The advance in demand of mobile and tablet technology should continue to drive Broadcom Corporation (NASDAQ:BRCM)’s growth. By offering a wide array of products, including chips that integrate multiple functions, the firm is well positioned to benefit from this situation; as a market share leader it provides to the most important manufacturers in the segment, like Apple, Samsung and Cisco. The ongoing expansion of the Pay-TV and internet market in emerging economies, especially India and China, should provide further growth opportunities.
A new product was launched a few days ago and promises to boost the firm’s revenue. It’s the industry’s lowest power consuming multi-port Gigabit physical layer transceiver, which delivers higher accuracy and consumes 40% less power than similar products in the market. This innovative product should help the company capture a bigger share of the market in the upcoming quarters, especially as handset designers tend to apply the collection of features and functions in their high-end products in order to remain competitive.
Trading at 25.8 times its earnings and 12.63 times consensus estimates, versus the industry averages of 49.5 and 26.31, respectively, I´d say that the stock is undervalued and comprises a strong buy, especially for the long-term. However, upside is expected in the shorter term, as average stock price target of $40.79 is set 11% above the current value.
Applied Materials: Revolutionary stock in the semiconductor industry
As one of the largest suppliers of fabrication equipment for semiconductors, LCD and solar PV (PhotoVoltaic) cells, Applied Materials, Inc. (NASDAQ:AMAT) provides compelling growth prospects, principally due to its huge advantage in R&D and its wide product offering. While margins have not been the best-in-class, several cost-cutting initiatives are being put in place.
Trading at only 14 times 2014´s EPS consensus estimate, I’d say Applied Materials, Inc. (NASDAQ:AMAT) is a buy, especially as growth is expected
at 73.8% for 2014 and at 9-10% until 2018. Here are some extra reasons to be long on this company:
- Its wide product portfolio, allows it to compete in almost every segment in the industry, attracting huge customers, not only for its R&D, but also for its pricing. Close relations with its clients help it create a high level of loyalty while gaining insight of the latest demands in the technology business.
- A strong balance sheet and plenty of free cash to be used provides the company with a considerable degree of immunity to the cyclical nature of the industry. At the end of first quarter, cash and short term investments reached $1.75 billion. Furthermore, the capability to deploy capital as needed allows it to penetrate new markets rather easily through both internal development and acquisitions, bolstered by strong marketing initiatives (Morningstar). Free cash is also allocated to dividends and repurchases. Actually, the company currently yields an attractive and constantly increasing 2.7%.
- Not only will Applied Materials, Inc. (NASDAQ:AMAT) benefit from the advance in mobile tech and the resulting boost in the production of semiconductors, but also from a growing demand of solar equipment, a segment that the firm has been and will continue to develop with encouraging early results, particularly in European countries. This business is less cyclical than the semiconductor sector, thus providing stability to the company.
Bottom line
Due to the constant increase in demand of mobile solutions and use of chips in almost everything, companies related to the semiconductors business seem to offer outstanding growth prospects. All of the above companies comprise buy cases; take a look and make a pick while they are still reasonably valued. These stocks’ prices could rocket at any time.
The article Buy the Smartphone Chip Suppliers originally appeared on Fool.com and is written by Victor Selva.
Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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