Zacks Industry Outlook Highlights: NVIDIA, Intel, Facebook, Apple, Microsoft, Cisco And IBM

For Immediate Release

Chicago, IL – January 10, 2017 – Today, Zacks Equity Research discusses the Industry: Semiconductors, including NVIDIA ( NVDA Free Report ), Intel (NASDAQ: INTC Free Report ), Facebook (NASDAQ: FB Free Report ), Apple (NASDAQ: AAPL Free Report ), Microsoft (NASDAQ: MSFT Free Report ), Cisco (NASDAQ: CSCO Free Report ) and IBM (NYSE: IBM Free Report ).

Industry: Semiconductors

Link: https://www.zacks.com/commentary/100510/semiconductor-industry-outlook---january-2017

This section can be divided into the current and emerging drivers. But before getting into that, it’s important to understand the backdrop. This includes a shrinking traditional market (mainly PCs) that still consumes the bulk of chips as well as several emerging categories that have extremely strong growth potential. This means that while the industry as a whole may appear sluggish, there are solid opportunities waiting to be picked.

Current Drivers

As far as current drivers are concerned, the most significant are cloud computing, big data and artificial intelligence that are increasing demand for servers and data centers exponentially. Intel and NVIDIA (NVDA Free Report ) are the strongest positioned here, with Intel’s strength mainly on the enterprise side and NVIDIA’s on the HPC side. Intel (NASDAQ: INTC Free Report ) is trying to dislodge NVIDIA, but that is easier said than done. HPC is where a lot of the innovation is going on and NVIDIA is set to pick up share of spending because of its lead in machine learning.

Some disruption is afoot in the enterprise segment as well because of the work done by the Open Compute Project (OCP) that Facebook (NASDAQ: FB Free Report ) founded and continues to feed. The social networking company generates huge volumes of data that it needs to store, manage and process as quickly and cost-efficiently as possible. Others with similar interest, like Apple (NASDAQ:AAPL Free Report ) , Microsoft (NASDAQ: MSFT Free Report ) and Google, and differing interest like Intel, HP, Cisco (NASDAQ: CSCO Free Report ) and Juniper are also part of the project.

Facebook designs the chip that is then optimized by the OCP so it becomes something members can standardize on. So far so good. But if the OCP is able to design chips that perform better or comparably with Intel chips, the chip maker’s cloud business can be hurt. This explains why Intel is part of the effort.

But Intel has other challengers, too. Google seems to be testing out IBM’s (NYSE:IBM Free Report ) new chip designs. It is reportedly the only top chip buyer that doesn’t sell servers but instead builds them for internal use. And the company is now also seeking growth in the IaaS segment. Therefore, Google’s decisions are extremely significant in the chip consumption context.

Google has done two things in the recent past that could be viewed as second sourcing or maybe creating leverage against Intel to pressure it into lowering prices. The company has declared that everything it now does also supports IBM’s Power systems and it is also in talks with Qualcomm that could result in its using some of its ARM-based server chips.

Amazon is the leading provider of cloud infrastructure followed by Microsoft, IBM and Google. This is another chip-hungry segment with long-term demand for the devices. This is perhaps the reason that some time back, Amazon started dabbling with low-end ARM-chips. The company looks interested in making its own devices, but it’s still too early to comment on its progress.

Intel’s only course of action is to innovate around the problem (increasing performance while reducing cost per watt is a way it could do this). After all, it’s hard to convince people that you deserve to make a nice margin. Another significant development is Intel’s decision to license ARM technology perhaps to support its foundry business, or help it speed up its IoT effort, or maybe even to use in some segments of the cloud computing market.

Microsoft seems allied with Intel for now, although we don’t know how that story will play out since it’s also a member of the OCP.

Another important segment for semiconductor companies that is relatively low-key is Industrial. Since semiconductors facilitate increased automation on the factory floor, they are increasingly used to drive efficiency and lower cost. Reportedly, PricewaterhouseCoopers (PwC) expects the industrial semiconductor market to grow at a CAGR (compounded annual growth rate) of 9.7% between 2014 and 2019. A Global Industry Analysts (GIA) report says that the U.S. is the largest market for industrial semiconductors although the Asia/Pacific is the fastest growing on account of its being a manufacturing hub. The overall market is expected to be worth $60 billion by 2022.

IC Insights estimates that global medical semiconductor sales will grow at a 12.3% CAGR to reach $8.2 billion in 2018. It’s not clear if this estimate includes wearables that are normally considered IoT and therefore included in consumer. Wearables carry an increasing amount of medical information and consume a good number of semiconductor devices. Databeans attributes continued strength in this vertical to the need to reduce healthcare cost (expected to double from the current $2.5 trillion over the next few years), the need to extend healthcare to underserved areas and convenience/the need to improve overall disease management from the comfort of your own home.

One of the fastest-growing emerging markets for semiconductor devices is automotive, as the consumption of electronic components for safety, infotainment, navigation and fuel efficiency continues to increase. A recent report from MarketsandMarkets says that the automotive semiconductor market will grow at a CAGR of 5.8% from 2016 through 2022. Power components like MOSFET and IGBT devices are some of the fastest growing because of the increased electrification of vehicles.

The growing middle class in several Asian markets like China, India, Thailand, Indonesia and Malaysia is greatly increasing the demand for passenger cars thus accounting for most of the semiconductor shipments into the automotive market. Semiconductor consumption in this market was worth around $7 billion in 2015, according to Reportlinker. Primary areas of strength were hybrid electric vehicles, telematics and connectivity, and advanced driver assistance systems (ADAS), where the estimated 5-year CAGRs for chip demand are 20%, 19% and 18%, respectively. Infineon, STMicroelectronics, Renesas, Freescale, Texas Instruments and Spansion (owned by Cypress) are major players.

Similar to medical devices, the auto market also has an emerging adjacent market in the form of autonomous/self-driving cars that will consume a huge number of semiconductors, particularly the sensors, processors and other technology enabling the vehicles.

Wireless infrastructure builds have been necessitated by increasing data volumes and connectivity issues (network congestion, power reliability, privacy and security) in wireless networks. These builds will require increased investment in semiconductors thus driving sales. New materials are being used in this segment with Galium Nitride gaining share of RF high-power semiconductors, according to ABI Research.

The PC market still consumes a large number of chips but its importance as a driver continues to decline. That’s because the market itself is shrinking (Gartner estimates that it declined 5.7% in the third quarter while IDC estimates that it declined 3.9%). IDC believes that North America grew for the second straight quarter while Gartner says that sales were consistent with year-ago periods. Both agree on declines in the Asia/Pacific.

Consumers are hesitant to spend on upgrades given that they already have many more devices than they need (developed markets) and because Internet and many other conveniences of computers are now easily available on smartphones and tablets (emerging markets). But gaming enthusiasts demand stronger and faster machines, which is the main driver of PC sales and chips right now.

In either case, it’s very clear that the steady growth seen in yesteryears is history. IDC for one expects the PC market to shrink 7.2% this year and 2.1% in 2017. So semiconductor players with PC market exposure can at best profit from market share gains, BYOD exposure and increased exposure to the top PC vendors, which are Lenovo, HP, Dell, Asus and Apple according to both IDC and Gartner.

Apple makes its own PCs, software and also a lot of its own chips, relying largely on Intel, Qualcomm and Samsung for its other semiconductor requirements. Microsoft makes software and limited quantities of hardware, relying largely on third-party device makers for chips, PCs and mobile devices. It’s also a major player in the cloud, which makes it an important ally for semiconductor companies like Intel or NVIDIA. Alphabet’s chromebooks, on the other hand, are made by a number of hardware makers that use either Intel or ARM technology.

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