Author: Neeraj Khanna
Monolithic Power Leading in AnalogGrowth
Monolithic Power Systems provides highly-integrated power
devices for some of the fastest-growing semiconductor markets, such as
automotive, industrial, and data centers. Power management circuitry
is becoming increasingly critical in many end markets, as it is vital to
energy savings, which is becoming a key design consideration in markets
beyond mobile devices. With its differentiated manufacturing process
technology and a focus on higher levels of integration than its competitors,
Monolithic has been able to outgrow its peers over the last several
years – a trend we expect to continue. Among other investment positives,
the Company plays well into our Robotics and Automation and
Connected Cars themes. We are initiating coverage of Monolithic Power
Systems with a Focus List rating.
Mellanox Accelerates the Use of Data
Mellanox Technologies, Ltd. is a fabless provider of high-performance
interconnect products based on the InfiniBand and Ethernet
standards. The Company is one of the founders and the leading provider
of InfiniBand, an industry standard architecture for high performance
interconnects. In September 2015, Mellanox acquired EZchip Semiconductor,
a public company based in Israel, which specializes in network
processing semiconductors. This acquisition broadens Mellanox’s product
portfolio and, in our view, should enable the Company to better
address the needs of its data center customer base. We believe that
Mellanox is uniquely positioned to benefit from the secular trends that
are driving data center growth and can also benefit from accelerating
high-performance computing (HPC) investments related to artificial intelligence
and machine learning. We are initiating coverage of Mellanox
Technologies with an Interest List rating.
Inphi: Small–Cap Big Data Play
Inphi Corporation is a fabless provider of high-speed analog and
mixed signal semiconductor products for the communications and
data center end markets. The Company recently divested its memory
business, which targeted computing markets, and is now a pure-play
focusing on data transport markets. We expect network traffic to keep
growing and, consequently, data centers and telecom networks to increasingly
adopt high-speed interconnect technologies. We believe that
Inphi is uniquely positioned to benefit from these secular trends, given
the Company’s deep understanding of the system-level architectures
required to efficiently and cost-effectively address data bottlenecks.
Among other investment positives, the Company plays well into our data
center/cloud computing theme. We are initiating coverage of Inphi
Corporation with a Focus List rating.
Lam Research Builds a Bigger, BetterEquipment Company
Lam Research Corporation is a global supplier of wafer fabrication
equipment (WFE) used in the fabrication of integrated circuits (ICs)
and related services to the semiconductor industry. The Company’s customer
base includes leading semiconductor memory, foundry, and integrated
device manufacturers (IDMs) that make products such as DRAM,
NAND memory, and logic devices. In October 2015, Lam announced
its intent to acquire KLA-Tencor Corporation (
), the market-leading
process control equipment provider. We believe this merger would yield
a compelling combination, given the companies’ leadership positions
across diverse equipment market segments. The combined entity would
serve roughly 42% of the WFE market upon closing. While the closing appears
to be delayed from mid-year to late 2016, we do expect the deal
to be completed. Among other investment positives, the Company plays
well into our Moore’s Law/Semiconductor Inflections theme. We are initiating
coverage of Lam Research Corporation with an Interest List rating.
MACOM: Highly Specialized Secular Growth Play
MACOM Technology Solutions Holdings, Inc. is a global supplier
of high performance analog RF, microwave, millimeter, and photonic
semiconductor products with a 60-year history of driving innovation. The
Company’s products enable the newest internet applications for the
cloud, aerospace and defense, and a broad array of industrial multimarket
applications. MACOM’s customer base includes top-tier companies
in each of its end markets. Over the past several years MACOM has
increased its footprint in adjacent markets by acquiring smaller product
companies which management expects will accelerate growth. We
view MACOM as well positioned to benefit from a number of secular
drivers in high-growth markets. We are initiating coverage of MACOM
with an Interest List rating.
The Search for Growth
For the last several decades, the semiconductor industry has played a
fundamental role in the growth of many other industries, including the
explosive growth of the personal computer, tablet, and cellular handset
device markets, which have grown from less than 500 million units
shipped in 2000 to 2.6 billion units shipped in 2015. However, in recent
years, the industry has matured, with growth slowing while development
and manufacturing costs are rising, reducing returns on investment and
prompting mergers. Companies without a road map will likely be consolidated
out of the industry, a fact clearly illustrated in 2015, which had
a record level of merger activity. Between 2015 and 2020, independent
research firms like IHS estimate a CAGR for the semiconductor industry in
the low single digits. The chart below illustrates the underperformance of
the Philadelphia Semiconductor Index (SOX) relative to the S&P 500 over
the last several years.
Broadcom: Built on 50 Years of Innovation
Broadcom Limited is the successor company that was formed
when Avago Technologies Limited merged with Broadcom Corporation.
The merger created the third-largest semiconductor company by
revenue, now one of the world’s leading suppliers of analog and digital
semiconductor products for a wide range of end markets, including
data center networking, connectivity solutions, broadband access,
telecom equipment, smartphones, wireless infrastructure, and storage
devices. Broadcom has many unique characteristics, the most important
of which are extensive technology and IP portfolios, highly differentiated
products relative to its competitors, and a strong base of global tier-1
customers, including Samsung and Apple. Among other positives, the
company plays well into our data center/cloud computing theme. We
are initiating coverage of Broadcom Limited with a Focus List rating.
Applied Materials: A Broad-BasedTechnology Leader
Applied Materials is the most diversified company in the semiconductor
production equipment (SPE) industry, with broad materials
engineering capabilities. The Company’s products are used by the
semiconductor, display, solar photovoltaic (PV), and other related industries.
Equipment sold to the global semiconductor industry makes up
the largest portion of Applied Materials’s revenues. There are a number
of secular drivers that we believe are positive for large SPE companies,
including 1) the continuing transition to FinFET transistors, 2) a transition
to 3D NAND memory, 3) consolidation in the equipment and semiconductor
component industries, and 4) continued IC unit growth driven by
growth in Data Center and Enterprise Infrastructure, Mobile Computing,
and the rise of Intelligent Devices. We are initiating coverage of Applied
Materials with an Interest List rating.
Economic Summary
Q2 GDP growth comes below expectation amidst robust consumer spending.
Underwhelming economic growth.
The U.S. economy grew 1.2% in Q2, much less than the consensus estimates of 2.6%, primarily due to the
inventory drawdown. Inventories fell by USD 8.1 billion, the worst fall since Q3 2011, as companies slimmed
down inventories and remained wary of investing amidst a weak global demand.
