Energy Efficient Servers, Smartphones and Tablet Computers Create DRAM and NAND Flash Inventory Tightening: Raymond James Expert Analyst Hans Mosesmann Identifies the Semiconductor Stock Winners and Losers

Wall Street Transcript

67 WALL STREET, New York - September 28, 2012 - The Wall Street Transcript has just published its Semiconductors Report offering a timely review of the sector to serious investors and industry executives. This special feature 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: Semiconductor Capital Equipment - Cloud Computing - Mobile Device Consumer Demand - Enterprise Data Storage Demand - High Computing Power Technology - Semiconductor Inventory Burnoff

Companies include: Apple Inc. (AAPL), Microsoft Corporation (MSFT), Intel Corporation (INTC), NVIDIA Corporation (NVDA), LSI Corporation (LSI), Advanced Micro Devices Inc. (AMD), QUALCOMM Inc. (QCOM), Texas Instruments Inc. (TXN), Broadcom Corp. (BRCM), Marvell Technology Group Ltd. (MRVL), Cree Inc. (CREE), Koninklijke Philips Electronic (PHG), Siemens AG (SI), Micron Technology Inc. (MU)

In the following excerpt from the Semiconductors Report, the expert analyst from Raymond James and Associates (RJF) discusses the outlook for the sector for investors:

TWST: Last time we spoke in May, we talked a lot about the supply/demand dynamics in the semiconductor sector. Since, how have those dynamics shifted, or if they've remained relatively the same, would you give us an overview of the current situation?

Mr. Mosesmann: So broadly speaking, the inventory-correction period throughout the supply chain in technology played itself out for roughly three quarters, Q3 and Q4 of last year and Q1 of this year. So during that time, from an industry perspective, depending on the specific area or end market or supply chain revolving around a specific end market, there continues to be different dynamics.

So we found out that hard disk drive inventories were rather high because of a sudden correction from the Thailand floods from late last year, entering early this year. So there was a supply and demand dynamic that went from shortages, and perhaps some overordering to some excess inventories right now.

On the other hand, we've gone from a significant area of oversupply in NAND flash, and maybe DRAM, mostly NAND flash, to something that looks like a tightening. So the supply/demand balance seems to be OK there. NAND tends not to be that much of a PC product. It tends to go more into handsets and tablets - even though we are seeing more solid state drives in PCs these days, it remains a minimal driver for the industry.

So it is real-mixed pictures, which I would say the conclusion to answer this question is that the issue is not inventories going forward for investors, it is really end demand, and that is a daunting kind of dynamic, but it is better than having to worry about inventories in the channel and end demand. So we've got one component or one dimension that we can worry about less than we did say a year ago, which is our inventory dynamic.

TWST: What do you see as some of the most interesting and promising end uses of your semiconductor companies' products? And which are the companies introducing the products you believe will be most successful in the marketplace?

Mr. Mosesmann: One of the sexier areas in technology or semiconductors used in these types of applications continues to be smartphones and tablets, where a rapid cusp of new product cycle from Apple (AAPL), iPhone 5, is going to be very exciting. And we have from Microsoft (MSFT), a version of Windows 8, which is also going to be launched in late October. This version of Windows 8 is called Windows RT, and it will allow for the first time non-Intel (INTC) or non-x86-type processors to be used to run Windows. And so it will allow Microsoft to challenge the likes of Samsung (005930.KS) and Apple more directly in the tablet, and even the smartphone, market over time. So that's another interesting product area.

And just in general, mobility is where it is happening, and the guy that seems, at least in my universe, that seems to be in a very good position is NVIDIA (NVDA). The company that seems to be struggling somewhat is Intel in this particular space. So there wouldn't be product cycles related to smartphones and tablets.

The other area that is perhaps not solidified as much is the deployment of solid state drives in the enterprise, data center, cloud. So it is up there in that crowd, and a lot of the performance and the performance per watts of power considerations that we all are cognizant about when we have a smartphone or a tablet or using one, that battery life to be as long as possible, some of those considerations are becoming as important or even more important in the data center and the cloud and in enterprise.

And so we are starting to see the deployment more and more of NAND flash, which is a solid-state-type of memory that is starting to become more and more important up there in terms of getting high performance at very, very low power because, for example, on the data center, it is not that important what operating system you are running, it is important in some cases, and all you care about is the performance per watt, per square foot, per dollar, and you could care less about what the brand is. I just need a fixed area where I can only jam so many servers and so many storage devices in a limited amount of space. I just want to have more bang for my buck with limited power usage.

So the interesting play there is a company I cover called LSI (LSI), and they also compete with a company I don't cover, but it is well known to investors that are trying to play this theme called Fusion-io (FIO). We prefer LSI. They are a much better storage pure play, and one of the components of their growth sectors is in the space of what I would call solid state storage for the enterprise and data center.

TWST: You have a "market perform" rating on Intel, which you mentioned a moment ago. What would be the tipping point for you to upgrade Intel to "outperform" or a strong "buy"?

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