Needham & Company on Communication ICs: 2012 Outlook - Initially Cautious But Expecting a Stronger Second Half
11:18 am ET 01/09/2012 - Street Insider
Needham & Company on Communication ICs: 2012 Outlook - Initially Cautious But Expecting a Stronger Second Half
Needham analyst, N. Quinn Bolton, said, "In 2010, semiconductor revenue grew 32% year over year. In 2011, however, industry revenue growth slowed dramatically as inventory levels increased and as economic uncertainty in developed countries mitigated strong demand in emerging markets. In aggregate, industry sales will be approximately flat year-over-year in 2011. With no quick fix to the European sovereign debt crisis and with inventory levels back to pre-downturn levels, we maintain a cautious outlook for semiconductor stocks entering 2012 and model only 2% revenue growth for the industry next year. We are watching several factors that could drive upside to our industry forecast and bolster investor sentiment, including the adoption of 3G entry smartphones, the Windows 8 operating system and ultrabooks, as well as a recovery in carrier capital expenditures. However, we believe a conservative outlook is appropriate entering 2012."
"Our cautious stance on semiconductor stocks entering the year stems from three factors: 1) inventory levels in the supply chain have risen to pre-downturn levels; 2) macroeconomic demand is unlikely to see a strong recovery in the near-term given ongoing sovereign debt issues in Europe; and 3) forward 12-month P/E multiples for large capitalization semiconductor stocks are currently near the high-end of their trading range over the past two years."
"Our outlook for the second half of the year is more constructive. From a macroeconomic perspective, we hope government officials in Europe will have outlined, if not implemented, a plan to deal with the sovereign debt crisis and restore stability to the financial markets. Benefiting many of our infrastructure communication IC companies, we expect to see an improved environment for carrier capital expenditures, both for wireline and wireless networks, as data traffic continues to grow exponentially. In the PC segment, we believe the combination of the launch of the Windows 8 operating system and broader availability of second-generation ultrabooks based on Ivy Bridge processors may spur a consumer PC upgrade cycle. Additionally, we believe broader availability of 3G entry smartphones will drive continued unit growth in the smartphone segment in particular and the overall handset segment in general. With these drivers in place, we currently expect a more normal seasonal pattern for industry sales in which 2H sales are stronger than 1H sales. If our view on industry revenue plays out as expected, we believe semiconductor stocks are likely to strengtheninto 2H12."
"Given our current cautious stance, we believe investors should not be in a rush to add to semiconductor positions early in the year but rather be patient and choose their entry points. With industry growth remaining muted in 2012, we find companies with exposure to the aforementioned trends are likely to grow faster than the market overall. We also like companies whose revenue streams are tied to specific product cycles rather than macroeconomic demand. Our favorite names heading into 2012 include Broadcom (Nasdaq: BRCM)(Buy), Cavium (Nasdaq: CAVM)(Buy), Inphi (Nasdaq: IPHI)(Buy), MaxLinear (NYSE: MXL)(Strong Buy), RF Micro Devices (Nasdaq: RFMD)(Buy) and Spreadtrum Communications (Nasdaq: SPRD)(Strong Buy). Our top defensive pick remains Microsemi (Nasdaq: MSCC)(Strong Buy)."
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