Skyworks Solutions has jumped into the long line of companies aiming to grab a piece of the so-called Internet of Things.
That was the message from Skyworks Solutions (SWKS) Chief Executive Dave Aldrich early this month. Aldrich noted in a company release that the Internet of Things (IOT) — the fast-growing network of everything from smart water meters to vehicle sensors and refrigerators, all connected to the Internet — will become a key revenue-growth driver in addition to chips being developed for smartphones and other devices.
"Skyworks is capitalizing on the growing opportunity within the Internet of Things," Aldrich said. He added that the IOT is one of several markets enabling the company "to substantially outpace the growth of the broader semiconductor market.
Last year, network-gear maker Cisco Systems (CSCO) forecast the number of Internet-connected devices will reach 50 billion by 2020 vs. 8.7 billion in 2012. If the projection is correct, Skyworks will appear to have had more foresight than some of its rivals, says Cody Acree, an analyst for Ascendiant Capital Markets in a June 3 report.
"Skyworks' IOT initiative is still unique vs. its peers," he wrote. "Skyworks was among the earliest to truly focus on this growing set of opportunities and devote sizable and specific resources to building a targeted business.
Even if Skyworks' focus is unique, it isn't alone. As a group, chipmakers earn the bulk of their revenue by providing chips for smartphones and tablets. But other chipmakers are rapidly moving to serve the Internet of Things market, says Samuel Wang, an analyst for market tracker Gartner.
"Everybody is jumping on the wagon to do something with IOT," he said. "They all want to participate in this opportunity.
Chip stocks have been in a general uptrend since November 2012. Year to date, the group is up 17%, surpassing in February its prior high from February 2011.
That performance lifted the group to a No. 6 ranking among IBD's 197 industries, up from No. 164 at the end of the year. Among the best performers in the group are Advanced Semiconductor Engineering (ASX), SanDisk (SNDK) and Micron Technology (MU).
Even Atmel (ATML) is seeing revenue growth accelerate following eight consecutive quarters of declines.
Atmel, Skyworks, SanDisk and Advanced Semiconductor all soundly beat revenue and earnings forecasts for their most recent reported quarters in April.
Micron also beat views for its third-quarter earnings on June 23.
All are major players, though few compete in the same pond.
Atmel provides micro-controllers for mobile and industrial devices. Advanced Semiconductor provides testing and packaging service to other chip companies.
SanDisk makes flash-memory chips used in mobile devices, while Micron focuses on dynamic random-access memory (DRAM) chips for industrial, enterprise and other uses. DRAM is faster than flash memory but volatile; data evaporate when the device is turned off. Flash memory is slower, but nonvolatile.
This year, global chip sales are expected to reach $336 billion, up 6.7% from last year, says Gartner. In April, Gartner predicted a 5.4% growth rate for the year.
Part of the expected growth rate is due to companies rebuilding depleted inventories, says Wang.
"Over the last few years, people did not build enough wafer facilities to produce enough chips," he said.
The overall market grows in single digits. That means that much of a chip company's revenue growth comes at the expense of rivals. It is especially true of larger companies, grabbing customers away from smaller competitors.
The business is about survival of the fittest, Wang says.
"The whole market may not be doing well, but (companies are) gaining market share — they gain while somebody else lost," he said.
Several factors favor chip growth.
The Internet of Things is one. IOT hardware and software spending will reach $7.1 trillion, up from $1.9 trillion last year, says market tracker IDC.
The growth will come as device connections increase, says Wang.
"Parts of IOT are yet to happen. You look at smart meters, connected homes, LED lighting controls — all of these will happen over the next few years," he said.
Smartphone use should grow, too. By the end of 2018, the number of global smartphone users will reach 2.73 billion, up from just over 1 billion in 2012, says eMarketer, a research firm.
Another industry driver: mobile games. By 2016, total revenue from mobile games will reach $28.9 billion, up 38% from the $20.9 billion expected this year, says Jupiter Research.
Despite those prospects, venture capital has largely cooled on the semiconductor industry.
Though total funding of privately held chip companies in Q1 rose 20.5% vs. the same quarter last year, overall funding to the sector fell 34% last year to $601.4 million, says the National Venture Capital Association and PricewaterhouseCoopers (PwC).
Several factors have limited the funding, says Mark McCaffrey, global software leader for PwC.
Most important: The industry is highly capital-intensive, McCaffrey said. "It isn't really looked at as disruptive technology right now, and they are competing against a software industry that has been on fire for the last 18 months or so.
While flash memory is already replacing portions of the DRAM market, the rising chip-tech wave is multidimensional, 3D chips. The new designs can be stacked to save space, and they provide more bandwidth and use less power than conventional devices.
SanDisk, a leader in the flash-memory market, is expected to become a big player in 3D via a joint development agreement with Toshiba announced in late May.
In the meantime, Micron is just starting to enter the flash-memory market, which could provide the bulk of its revenue in a few years, Wang says.
"M-flash will eventually replace the importance of DRAM and become more popular in the system in the mobile as well as the solid-state drive," he said.
On June 16, SanDisk announced that it would expand its presence in the large-scale, high-technology data storage market — called enterprise data storage — by acquiring Fusion-io (FIO) for $1.1 billion in cash. The deal was SanDisk's fifth enterprise-related acquisition since 2011.
Other markets also present expanding opportunities for chip companies.
Global sales of auto-related chips are expected to exceed $41 billion by 2021, up 49% from the $27.5 billion last year, says Strategy Analytics.
Atmel, once a leader in the mobile-device touchscreen market, has tapped surging growth from the auto sector, says Chris Caso, an analyst for Susquehanna Financial Group.
The strongest chip markets are occurring outside the IT space, Caso said: "The amount of electronics in autos is exploding; you look at a midrange or entry-level car, and it's got semiconductors all over the place.
Advanced Semiconductor is in hot pursuit of opportunities in SiP, or system-in-packaging chips, said Eric Chen, an analyst for Daiwa Capital Markets in a May 26 report. SiP chips package multiple integrated circuits into systems used in mobile phones and other compact devices.
"We forecast system-in-packaging revenue to rise by 40% to 50% half over half for the second half of 2014, driven by the Apple (AAPL) fingerprint sensor, sensors for the planned iWatch and sensors for Samsung Electronics' Galaxy S5 heartbeat function," he wrote.
The chip industry faces healthy opportunities, but the industry in the past has tended to be volatile and highly cyclical. Rising production capacity coupled with sudden declines in IT and consumer spending can cause inventories to spike and prices to plunge.
• Upside: Several companies are expected to capitalize on the resurging market growth, Wang says.
"We appear to be heading in the right direction," he said. "This year, the economy is better, we no longer have the financial cliff; the U.S. is improving.
But he's not blind to economic danger: "In Europe, the central bank has gone negative — that is a big risk.
Offshore mobile growth could be a primary catalyst for Skyworks' Q3 earnings, said Vijay Rakesh, an analyst for Sterne, Agee & Leach in a June 19 report.
"We believe Skyworks should have a strong September quarter and second half of 2014, driven by broad 3G-4G handset and content tailwinds from emerging countries and China," he wrote.
SanDisk can grow while keeping its costs in check, said Ambrish Srivastava, an analyst for BMO Capital Markets, in a May 8 report.
"With a clear lead in planar process technology and what appears to be a methodical approach to 3D technology, SanDisk appears set to maintain its cost leadership for some time," he wrote. "Capital intensity is expected to stay within the band of 20% to 30% despite the more complex 3D transition ahead.
• Risks: Device demand.
Global tablet shipments fell 3.9% to 50.4 million in Q1 vs. the same quarter last year and 35.7% from the holiday-fueled Q4, says IDC. Consumers tend to hold onto their tablets longer, and the business community hasn't picked up the slack.
Atmel's resurgence is coming through its micro-controller product for industrial devices and its CryptoMemory chips for electronics devices, which can prevent counterfeiting.
What comes next is the biggest hurdle, says Christopher Rolland, an analyst for FBR Capital Markets. "Finding new areas of sustained growth is going to be one of their biggest challenges," he said.
Though Advanced Semiconductor's electronic manufacturing service area appears strong, the company's integrated-circuit back-end business for semiconductor assembly and testing could be in question, barring an acquisition in the market, says Daiwa's Chen.
"This is because competition in the flip-chip CSP (chip-scale package) business is intensifying," he wrote.
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