2010 Semiconductor Stock Winners Revealed By Senior Analyst; Discover His Favorites
September 2, 2010 - The Wall Street Transcript has just published Semiconductors Report offering a timely review of the Semiconductor Equipment 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.
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Jeffrey Schreiner is the semiconductor Analyst at Capstone Investments. Mr. Schreiner incorporates fundamental and quantitative research for finding potential investment opportunities. Mr. Schreiner earned a B.A. degree in business administration from Ottawa University and holds Series 7, 24, 63, 86 and 87 licenses.
TWST: What do you cover in semiconductors?
Mr. Schreiner: My current coverage is EZchip Semiconductor (EZCH), Rambus (RMBS), Cypress Semiconductor (CY), Cirrus Logic (CRUS), MIPS Technology (MIPS), AuthenTec (AUTH), Immersion (IMMR), Integrated Silicon Solution (ISSI), Standard Microsystems (SMSC), IXYS Corporation (IXYS) and Synaptics (SYNA).
TWST: Who within your group are the standouts and why?
Mr. Schreiner: Our top pick in the mid cap is Rambus. Our top small-cap pick is EZchip. The other two names within our coverage we're really pushing in terms of the long side would be Cirrus Logic and Cypress.
TWST: And Cypress?
Mr. Schreiner: Cypress, that's a real "steady-eddy" story. They always seem to deliver and do what they need to, not always getting the reward or recognition that maybe some of their competitors or peripheral companies may get. You've got a lot of growth in several end markets. You've got the SRAM market - the SRAM market is tied to the telecom market, so strong growth like we're seeing right now in telecom equipment spending is very important for the SRAM market, which is about $1 billion. Previously Samsung was the market leader, but Samsung stopped investing in this market. Cypress now believes they are the number one market share leader. It's a market which will slowly erode over the next 10 to 20 years, but if you're able to achieve 30% to 40% share, which is similar to what CY believes they could potentially achieve, that's a $300 million to $400 million business a year with very high margins. So that's a very good business and a very good story that I think hasn't been given a lot a credit. But after this last earnings call and how significant the margin improvement was and growth in revenues, I think it's caught more investors' eyes.
The next part of the growth is really the PSoC market. Previously, they had a PSoC 1 product, an internally designed solution. Now they are moving to PSoC 3 and PSoC 5. The PSoC 3 is an Intel 8150 kind of a standard market microcontroller core, and PSoC 5 is integrating an ARM core. So you have now around a $1.5 billion opportunity from PSoC 1, which won't stop shipping or be cannibalized by PSoC 3 or PSoC 5. Those products are serving new opportunities not previously available to Cypress. Following inclusion of PSoC 3/PSoC 5, you have almost a total available market of around $15 billion between those three product lines. Cypress has done a great job with its PSoC, where PSoC 1 was not really even up to par in terms of the data sheet to some of these other 8-bit microcontroller companies. But Cypress is a top 10 microcontroller company after being at number 40 or 50 in the world in 2002. It only took four to five years to achieve this.
Finally, the other real opportunity is the touchscreen market. We see them taking a lot of share away from incumbent Synaptics. When we look at the market in the future, maybe two years from now, we think Atmel (ATML) and Cypress will be market leaders. Synaptics will probably be a distant third. Cypress is already seeing designs which will be shipping in third quarter for tablets, which are non-iPad-based tablets. In our mind, that's a big opportunity because they're first to market with that product, the tablet product, outside of Apple, whereas Synaptics always previously had been, and that's not the case this time. We think there are a lot of other positive operating drivers as well. They've been talking about some structural, long-term changes to business, which has started to show a lot of margin improvement, and they've seen significant margin growth from the trough, which we discussed earlier, in 2009 to where we are today in the business model.
TWST: The last leader you mentioned was Cirrus Logic. What's their story?
Mr. Schreiner: It's really an Apple story as we discussed earlier. They do have another business opportunity that we really like, and we are trying to drill and do more research which is within their energy products, which gives them a little bit more stability. Energy is also a little bit higher margin than some of the audio-based stuff, and a new growth opportunity beginning to emerge is within power meters, the smart meter market. They do power monitoring inside the smart meters. They receive somewhere around $0.60 to $1.00 for these designs, but they work with market-leading vendor Itron (ITRI). What we were very impressed to learn is that they and Itron have a sole-source agreement, making this is a proprietary part for Cirrus. What we've been concerned about is that there was another player named Teridian, a private player who was brought by Maxim (MXIM), and previously Teridian had been a real leader in its space. However, they believe because of proprietary design, Teridian really will have no chance of coming in and working with Itron, which is one of the worldwide leaders in power meters and smart meters worldwide. I think that's a very large opportunity that's just starting to yield some fruit, and it's giving some stability to the energy markets, which were much more volatile based on the few products they offered which targeted some seismic products for oil. So as oil went up and down, their energy revenues were going up and down, but we think this adds a lot more stability.
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