600 Million Users For China Mobile (CHL) Soon To Upgrade To 3G Connectivity; A Massive Undertaking With Highly Profitable Opportunities
December 7, 2011 - The Wall Street Transcript has just published Semiconductors Report offering a timely review of the 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.
Kevin Cassidy joined the Stifel, Nicolaus & Co., Inc., research team in connection with Stifel's acquisition of Thomas Weisel Partners LLC in July of 2010. Mr. Cassidy joined Thomas Weisel Partners in August 2007, covering the power management and broadline segments of the semiconductor industry. Prior to joining TWP, he was a Research Analyst at Piper Jaffray & Co. Mr. Cassidy brings over 20 years of practical semiconductor industry experience through various sales positions. He has an electrical engineering degree from the University at Buffalo, The State University of New York, and a B.S. in mathematics and physics from SUNY Geneseo.
TWST: Are there other important drivers in the space?
Mr. Cassidy: When the iPhone first came out, you remember how AT And T (T) network got bogged down because everyone was on the network accessing data. Users were getting kicked off because there just wasn't enough bandwidth. So now all the wireless carriers are expanding their capacity. The carriers need more bandwidth - or bigger roads, if you think of it that way. They need higher-speed connections, and that's what 4G or LTE networks offer. These are new base stations, new antennas that are being built around cities to offload all the data traffic so that the 3G networks can run voice again and not get bogged down. There is good growth in the communications.
All the ways that we communicate electronically are being upgraded. That's not as obvious for the average consumer, but it's a huge growth market. In the U.S., there are 300 million people. In China, it's billions of people, and there's three different phone networks in China. One is China Mobile (CHL). China Mobile has 600 million subscribers, and they're mostly all still using 2G. They haven't even moved up to 3G yet. China is deploying antennas to support 3G signals. This should result in all those people to buy new phones and upgrade to 3G connections. This is a marketing person's dream. The inflation rate for China for wages is somewhere close to 20%.
TWST: What are your favorite stocks in the space right now and why?
Mr. Cassidy: Intel, for one, because of this manufacturing capability that they have that no one else in the world has. I think by this time next year they'll have a full year head start on everyone else in the world. If you can make smaller transistors, that means you can make products with more capability at lower power and lower cost. Their latest chip is going to have 1.5 billion transistors on it.
TWST: Who else do you like?
Mr. Cassidy: There's a smaller company, Mellanox (MLNX). Similar to most PCs today that have Ethernet connection, most servers use higher-speed Ethernet to communicate to each other in a data center. A little over 10 years ago, Mellanox worked with a group of other companies to come out with a new standard for higher-speed and lower-latency networks called InfiniBand. For 10 years, InfiniBand been a niche market. Research centers and maybe college campuses were using InfiniBand. That was their standard. But now with all these data centers and the higher-performance Intel processors, there is a need for both faster memory and faster ways of getting that information in and out of the computer.
InfiniBand has the merits to meet the new demands. Now I see it as the mainstream applications have caught up to what InfiniBand offers. Mellanox has been developing high-speed networks for 10 years and now the world needs it. Mellanox is growing 20% a year.Last year in December, Oracle (ORCL) tried to acquire Mellanox. Oracle uses InfiniBand in their Exadata and Exalogic products. They liked InfiniBand so much that they wanted to acquire Mellanox. Mellanox management resisted the acquisition with the view that it was too early to sell out. Mellanox is only about $250 million in annual revenue now, and we think they can get to $1 billion in the next three to five years. There is more shareholder value in the company at $1 billion in revenue, in our view. I like Mellanox's market and the unique value Mellanox brings to this market.
TWST: Will we see consolidation in the space?
Mr. Cassidy: Definitely. Companies just can't afford to get into the huge markets as a small company. Our favorite name this year has been NetLogic (NETL). NetLogic was recently acquired by Broadcom (BRCM) for a 60% premium. This is an example of a company that made processors used in communications. NetLogic was growing at 20% a year, very profitable and even making some acquisitions of its own. Key customers are Tier I communications companies such as Cisco, Alcatel-Lucent (ALU), Huawei, etc.
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