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Zacks Industry Outlook Highlights: Intel, ARM Holdings, IBM and Cisco - Press Releases

For Immediate Release

Chicago, IL – May 21, 2015 – Today, Zacks Equity Research discusses the Semiconductors (Part 1), including Intel Corp (INTC), ARM Holdings (ARMH), IBM ( IBM) and Cisco (CSCO).

Industry: Semiconductors (Part 1)

Link: https://www.zacks.com/commentary/46321/semiconductor-stock-outlook---may-2015

Semiconductor Outlook: Building on Traditional Strengths

The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices.

As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.

In this part of the outlook, we are discussing how the evolving nature of markets using semiconductors is shaping their growth. Thus, we have broadly categorized these markets into three buckets.

The IoT Bucket

The Internet of Things (IoT) opportunity is considerable for semiconductor players. While growth expectations have moderated over the past year or so due to adoption rates trailing expectations, it’s still expected to yield several hundred billion dollars for industry players over the next five years. The opportunity is split between the IoT devices connecting to the Internet and the cloud facilitating their existence.

In order to tap the growth potential in IoT devices, industry players have to enable much greater chip integration (a typical IoT device requires microcontrollers, sensors, connectivity and storage chips, but in an extremely small package). Adoption will increase only with very low-cost chips that will not require high compute power in many cases. So the challenge here is cost, which can be overcome only with very high volumes.

IDC estimates that the IoT market will grow at a 7.9% CAGR from 2013 to 2020. Industry experts estimate that the “things” part of IoT will account for roughly 10% of IoT device value. This probably means that semiconductor companies will attempt to make more of these “things” to partake in more of the growth, which would explain innovations like Intel’s MICA bracelet. Prime enablers of IoT growth are likely to be companies like Intel Corp (INTC) and ARM Holdings ( ARMH), although many other players will play a role.

The opportunity in the cloud is far broader because the demand for more powerful chips (with more processing power) is now being supplemented with a growing demand for lower-cost chips that can handle simple operations in high volume. The data captured by sensors in IoT and other devices is useful only when it is stored, sorted and analyzed in a protected environment, which is when it becomes valuable for industry players like retailers, healthcare professionals and marketers. Semiconductors enable this process at every stage, but the limited standardization in the systems created by tech companies are bottlenecks in the smooth flow of data.

That’s why big companies like Intel, IBM (IBM), Cisco ( CSCO) and others formed the Industrial Internet Consortium to develop common standards. The process could take time but once available, the standards could generate higher-margin revenue for semiconductor players.

The Computing/Consumer/Communications Bucket

These markets remain the primary consumers of semiconductors today. But there’s plenty going on under this broad head other than the miniaturization that led to IoT devices.

As mobile devices with varying capabilities enter the market, demand has become greatly linked to geography. In most developed markets, tablets are a second or third computing device a person would buy and this market is largely saturated. Innovation is also reaching its limits making it harder to sell new versions. Larger phones or phablets are also taking over.

In developing markets, on the other hand, smartphones and now increasingly tablets, are the primary computing device and projected growth rates are strong. With Google announcing Android One in several markets and Microsoft announcing several cheaper devices, a whole new market has opened up, which is positive for semiconductor players. So semiconductor players with greater geographical diversity have stronger chances of tapping this opportunity.

At least some of the mobile market enthusiasm is shifting to enterprises as employers increasingly recognize the benefits of having constant contact and collaboration with field personnel. And legacy workloads are correspondingly moving to the cloud so more devices have access to them. Mobile adoption at enterprises adds to chip sales because it drives demand for devices on the one hand and cloud capacity on the other, both of which require fresh investment in technology and chips.

Enterprise workloads usually require greater computing resources so there is tremendous scope for semiconductor companies in this segment. But they also require denser, energy efficient and secure data centers and networks, and more intelligent network control. Here, too, semiconductor companies like Intel can play a role.


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