Electronic Content Of Cars Has Risen 10% To 15% In The Last Six Years, Presenting New Opportunities For Semiconductor Growth, Says Managing Director Of UBS Investment Bank

Wall Street Transcript

67 WALL STREET, New York - December 15, 2011 - The Wall Street Transcript has just published its Semiconductors Report offering a timely review of the sector to serious investors and industry executives. This Semiconductors Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Energy Efficiency, Cloud Computing and Telecommunications - Semiconductor Content Increase Across Verticals - Semiconductor Manufacturer Consolidation

Companies include: ARM Holdings' (ARMH); AMD (AMD); AT&T (T); ATI (ATI); AUO (AUO) and many more.

In the following brief excerpt from the Semiconductors Report, interviewees discuss the outlook for the sector and for investors.

Uche Orji is a Managing Director in the technology group of UBS Investment Bank. He covers large-cap semiconductor companies. Before joining UBS, Mr. Orji worked at J.P. Morgan Securities in London, where he established the team as one of the top semiconductor teams in Institutional Investor's "All-Europe Research Team." Mr. Orji also has held top positions in the Thomson Reuters Extel Survey. Previously, he was an Analyst and Fund Manager with Goldman Sachs Asset Management based in London. Before that, he had positions in Lagos, Nigeria, with Diamond Bank Ltd. and Arthur Andersen LLP. Mr. Orji holds an MBA from Harvard Business School and a bachelor's degree in engineering from the University of Port Harcourt in Nigeria.

TWST: What are the major growth areas in the space?

Mr. Orji: There are still many growth areas in semi. Let's start with smartphones. The semiconductor content in smartphones is increasing from the processor to the storage to all the peripherals. High-end smartphones are going from a single-core processor to a dual-core processor and will go on to a quad-core processor by the middle of next year. That drives the incremental value of the microprocessor in the phone. If you look at the storage, recently Apple (AAPL) launched the 4S with a new 64-gigabit version of its phone. All of that storage is solid-state storage, also known as NAND flash. That's 100% semiconductor. So the value of the storage is doubling now within the phone. But more importantly is the fact that smartphones are growing significantly faster than just about any other single gadgetry that we know. So that's one. Tablets also are growing. The iPad has gone from zero a year and a half ago to something like to 11 million to 12 million units every quarter.

There is a significant amount of semiconductor content in the iPad. So tablets and smartphones are one category. PCs are still growing. Even if the PC units themselves don't grow, the semiconductor content within the PC continues to rise. Intel has outgrown most tech companies purely by increasing within the PC market. Intel (INTC) is what's pushing growth close to low double digits this year, even in a tough year like this. While it's true that PC growth has slowed down a little bit relative to where it has been in the last 10, 15 years, it's still relatively growing. Unit basis is growing in the emerging markets, for example. Brazil has gone from the number eight market for PCs five years ago to number three now. China currently buys more PCs than the U.S. does now, and is number one is the world. U.S. is number two, Brazil is number three. So emerging markets is growing. Turkey, Indonesia, Malaysia, all these countries are growing their PC purchases, and it's all coming from the affordability factor. They can afford it now. The number of weeks of wages required to buy a PC in an emerging market has dropped significantly and the price of the PC itself has also dropped a lot. So this affordability is what's driving the growth of PC in emerging markets. Automotive is another market. There hasn't been a significant increase in the number of cars sold, but the electronic content of cars has gone up a lot. We estimate the electronic content of cars has been rising something like 10%, 15% CAGR over the last six years. So electronics inside the car, such as flat-panel TV screens, is going up, but it's also going up in terms of the parts that make the car run, like electronic steering, electronic brakes, lane monitoring systems and electronic sensors.

All of these things, components are electronics or semiconductors. Semiconductors are growing in medical equipment. I can go on and on and on. But the reality is that the growth you're seeing is relatively more subtle than people realize, in more areas than people realize. The ones that are obvious to most of us are things like smartphones and tablets. But what are not so obvious are areas like automotive, medical equipment and industrial appliances. Most semiconductors today in industrial appliances are aimed at power management, improving the power efficiency of automation equipment. It's all semiconductor. If you look at the sector, it's grown from a few years back in 2000, which was the last major peak for semiconductor. Worldwide semiconductor revenue was $204 billion. We estimate that you will be exiting 2011 with revenue of $310 billion in the sector. Last year, it was $300 billion. So it has grown a total of 50% in 10 years. And don't forget that in those 10 years, we've seen significant recessions. We had 2001 where revenues dropped 32%, and 2009 where revenues dropped 10%. But overall, I think the trajectory is good; and while the next three years may be challenging, we think the prospects over the next five years are very good. This year, we expect revenue will be up 3%, next year maybe up 5%, if we're lucky.

But I believe that the CAGR for the next five years is somewhere around 8% to 9% CAGR. So I'm hopeful that sometime in 2013, or perhaps even in the second half of 2012, once we're able to get rid of all the macro issues affecting the world today, we might actually see a significant revenue growth for this sector. The underlying demand drivers are intact. Today, most people want a smartphone. Most people want a sleek tablet or PC or MacBook. People want electronics in their cars. People want more energy efficiency in their homes. All these things are the underlying drivers that will drive semiconductors. The semiconductor content in an electric car, for example, is four times the semiconductor content of a regular car. Even when you look at military spending, you see drivers for semiconductors. As the military shifts to spending a lot of money on drones and that type of warfare, they will use a lot more semiconductors.

TWST: In addition to Intel, who are some of your other favorites in this space right now?

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