Semiconductor Valuations Are Close To Bottom, Says Jefferies And Company Senior Research Analyst; An Entry Point To Semiconductor Companies Exposed To Global Wireless Infrastructure Buildout
December 5, 2011 - The Wall Street Transcript has just published Semiconductors Report offering a timely review of the Semiconductors sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
Sundeep Bajikar is a Senior Semiconductor Research Analyst at Jefferies and Company, Inc. He was previously in a similar role at Morgan Stanley for about five years, before which he was in engineering and strategic planning positions at Intel Corporation for nine years. Mr. Bajikar holds an MBA in finance from The Wharton School of the University of Pennsylvania, in addition to an M.S. in electrical and mechanical engineering from the University of Minnesota. He also has completed graduate-level engineering course work at Stanford University, and holds 10 U.S. and international patents issued in his name, with more than 20 additional patents pending.
TWST: What is your broad view of the semiconductor group as a whole?
Mr. Bajikar: We watch the cycles carefully and do a lot of different research and frameworks to figure out where we are in the cycle relative to previous cycles. The industry seems to go through these cycles fairly regularly from our standpoint. We have a positive view of the industry as a whole. We think the investor opinion is bottoming on the industry, and the bottoming process is being elongated due to compounding with the weak macroeconomic environment, and we have number of different cyclical frameworks to address this. But the net of it is that at this point of the cycle, when we are close to the bottom, we typically stay with names that have strong product cycles in a couple of different categories, particularly if those product cycles are related to broader secular trends in the industry. Those are the names that we favor the most.
We also favor names that are more defensive, which have a more certain cash flow, and these would be people like the analog semiconductor names or even people like the microcontroller manufacturers like Microchip (MCHP). Those become more of a safe haven, so they are good in bad times. On the other hand, going from the bottom to the up cycle, they aren't necessarily going to give you the best investment upside.
TWST: What are some of the broad trends that you're looking at right now?
Mr. Bajikar: There are some specific ones that I have done a lot of work on. If you look at communications infrastructure and divide it into two parts, the first part would be wireless infrastructure and the second would be wireline.
Within wireless infrastructure, you have some interesting dynamics going on in the base station market, so this would be base station that serves the cell phones globally. In the U.S., you have a big transition going on to the fourth-generation wireless, which is called LTE. That has some implications, and on the basis of that, we have certain specific views on the stocks we cover. Internationally, where countries are transitioning from the older second-generation wireless to third-generation wireless, we have a different part of that view, which also factors into our stock views. The other piece of wireless other than the base stations themselves is the equipment that's used to transport the voice and data from the base stations into the core of the network, and that's called mobile backhaul. Because of the transition going on toward LTE, there is a need for hybrid backhaul technology which can handle the older-generation, time-division multiple networks as well as newer-generation packet networks. That creates opportunities for several vendors to participate in that particular market.
On the wireline side, we have a couple of different themes, and we tend to take a more holistic view of wireline, where we include the cloud and data center as part of the wireline infrastructure rather than just keeping it to the communications infrastructure. So within that view, clearly one area is the growth in the cloud and the data center, and a lot of the developments in the cloud seem to be missed by investors because they are happening at nontraditional but large players like Google (GOOG), Amazon (AMZN), Facebook and others. Some of the actions of these players in servers and storage tend to be missed by the standard industry data sources. So there is virtualization, there is efficiency-driven trends that are happening in the cloud, and they have implications on the semiconductor that we cover. That's one area we look at.
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