Chip-Makers Emerge Strong From 2008-2009 Slump - Ambrish Srivastava - BMO Capital Markets Corp.
August 30, 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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Ambrish Srivastava is a Senior Research Analyst based in the San Francisco office of BMO Capital Markets Corp., where he covers the semiconductor industry as part of the technology team. Prior to that, he was the Semiconductor Analyst for BMO and predecessor firm Gerard Klauer Mattison, as well as for ABN AMRO. Earlier in his career, Mr. Srivastava worked as a Manager for Pittiglio Rabin Todd & McGrath, a management consulting firm, where he led a number of projects for large technology companies. He began his career at International Specialty Products, where he led the development and implementation of the company's new product commercialization process. Mr. Srivastava earned his Ph.D. in engineering from Rensselaer Polytechnic Institute, his MBA from Cornell University's Johnson School of Management and his bachelor of technology from the Institute of Technology, BHU, in India.
TWST: What major themes are you monitoring in semiconductors right now?
Mr. Srivastava: I like to look at semis in the context of broader themes in technology. This is especially true now, in the absence of any bottoms-up theme emerging from semis, like a major breakthrough in semiconductor technology. I believe that the ongoing shift to mobility is a broad secular theme that will continue to impact tech companies and semiconductor companies for quite some time. Some chip companies are very well positioned to benefit from this theme, such as ARM Holdings (ARMH) and Broadcom (BRCM), while others, such as Intel (INTC), have to find ways to continue to evolve to address the changing dynamics in the marketplace. The shift to mobility impacts not just companies that enable you and I to carry around low-power devices and access data, but also impacts chip companies that supply the nuts and bolts for building the infrastructure. Such companies are Altera (ALTR) and Xilinx (XLNX). Another theme, albeit a little more medium term in nature, is the return to enterprise spending.
TWST: When you talk about stock picking, what attracts you to a certain company or stock? Is it necessarily the same thing for both?
Mr. Srivastava: Nope, and I try not to get into that trap because good companies can be lousy stocks, and that's not a reflection on the company at all. Linear Technology (LLTC) is, I think, by far one of the best-run companies, not just in semiconductors but also outside of semiconductors. And this company just posted 53%-odd operating margin, but not necessarily a great stock. The valuation is high and already reflects the superior operating model. To me, management is certainly important. If I can't trust the management team, then I can't recommend a stock or, for that matter, invest in that stock. So that's a box that I like to check off pretty early in my due diligence. I also look at a company's larger opportunity. There could be a certain trend that a company can be benefiting from, but if that trend is just short term, it isn't extremely positive to me.
So I typically don't go after those stocks. I like to look at companies that have sustainable competitive advantages for one reason or another, whether it's because of their ability in technology to come up with new products and be able to attack new markets and dominate - that would be a Broadcom - or in Intel's case, which has good competitive advantage in how it can spend to keep up with what's required to keep up with Moore's Law. I also look at a company's ability to generate free cash flow and at return on invested capital, ROIC. ROIC is especially important if a company is transitioning from a lower ROIC to a higher ROIC, you will get rewarded as a shareholder. If the company is already in that echelon of very high ROIC, then the valuation typically reflects that. I also look at valuation and tend to be pretty valuation sensitive. In very few cases do I give a stock a pass on high valuation. I will do that if I believe that it's a very long-term secular trend.
TWST: Who do you like in your coverage now and why?
Mr. Srivastava: I have quite a few names that I like. I like ARM Holdings, Broadcom, Intel, Marvell (MRVL), Texas Instruments (TXN) and Sensata (ST). To answer your question, which one do I like more today, it's always a hard one to answer for me. I like all these for different reasons. Basically, I have two buckets of names I like. One is if I can identify a big tailwind, so that's one bucket. The second one is very stock specific, which is a product story, valuation or a combination of both. ARM Holdings would fall under the category of a big tailwind in mobility, and Broadcom would fall in the second category of being driven by a product story in several end markets. In terms of who now and why, often with investors the question then comes down to where do you see the most appreciation or risk-reward ratio?
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