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Investing in Semiconductor Stocks: Three Chipmakers on the Upswing

By , Money Morning •

Global semiconductor sales have been pretty listless lately, but new data suggests a turnaround is on the horizon for this sector.

In fact, one new forecast by research firm IDC predicts the rate of growth in the semiconductor sector could potentially double in the latter part of this year.

For semiconductor stocks, this newfound growth could provide a big lift in profits.

Even smaller chipmakers may have suitors knocking on their doors for takeovers as they look to increase their market share.

What does this mean for investors?

Now is the time to start looking for the next big winner in semiconductors.

Here's why.

Semiconductor Stocks in 2012

According to IDC,semiconductor sales increased 3.7% to $301 billion last year thanks to increased orders for wireless-device chips.

But 2012 looks even better. The forecast has worldwide semiconductor sales increasing 6%-7%. This will come from declining customer inventories and the never-ending demand for smartphones, tablets and "iDevices."

According to the Semiconductor Industry Association (SIA), March worldwide semiconductor sales were already $23.3 billion, up 1.5% from the previous month.

"We are encouraged to see that sequential growth resumed across all regions, especially in Europe and Japan, in March," said Brian Toohey, president of SIA. "We look for seasonal moderate growth to continue in the second quarter and build momentum as 2012 progresses."

Across the globe, European sales increased 3.8% in March, while Japanese sales rose 1.2%. Along with improving macroeconomic conditions and a recovering supply chain from the 2011 Thailand floods, SIA sees an improved outlook.

Semiconductor companies are already reflecting the improvement.

Intel Corp. (Nasdaq: INTC), the world's largest chipmaker, just announced a 7.1% rise in its quarterly dividend to $0.225 cents. Thanks largely to the mobile phone market, INTC believes it is now poised to see "record revenues" this year.

According to Paul Otellini, president and chief executive officer, "Strong demand in our core business and significant progress in smartphones will help drive the gains. This latest dividend increase is one more example of our commitment to return cash to our stockholders."

Qualcomm Inc. (Nasdaq: QCOM) is another.

The chipset maker recently saw its total revenue rise 27.7% year over year to $4.94 million in Q2, surpassing the $4.85 million in analysts' estimates.

Going into the rest of the year QCOM has record-high earnings, a solid balance sheet, lots of product in the pipeline and improved market segmentation.

Investing in Semiconductor Companies: Three Winners

With the recent spate of earnings reports, semiconductor stocks are clearly on the upswing.

Here are three semiconductor stocks worth taking a serious look at:

  • Advanced Micro Devices (NYSE: AMD): The second largest producer of microprocessors, GPUS and chipsets worldwide, AMD has a $5.07 billion market cap.

On April 19, the company reported its first quarter earnings and saw its revenue fall 1% year over year with a 6% decline from the first quarter. But its adjusted profit per share rose 50% from the previous year's period.

The company expects its second quarter revenue to either be flat or to increase up to 3% from the first quarter to $1.63 billion. Analysts had expected $1.59 billion for the quarter.

But don't be put off by the recent figures.

AMD plans to cut its costs for cloud computing and the number of data centers it operates globally through "the help of the cloud and hardware upgrades."

Its plan is to move more tasks to the cloud and subsequently open data centers in areas with fewer costs and a smaller tax burden. Increased use of cloud technology will give the company's engineers the opportunity to create chips regardless of where they reside.

Showing additional commitment to change, the company recently announced a new CMO, Collette LaForce. The Dell veteran will restructure the company's global marketing efforts, enhance the company's voice and assist in positioning it for growth.

  • Texas Instruments (Nasdaq: TXN): Practically synonymous with semiconductors, TXN sells to electronics designers and manufacturers worldwide. It operates in four segments including analog, embedded processing, wireless and specialized.

Texas Instruments has a $36.85 billion market cap and is the fourth-largest semiconductor company when measured by 2011 revenue.

The company recently announced the "industry's most highly integrated audio codec with embedded miniDSP cores, providing echo and noise cancellation at wideband voice sampling rates up to 16 kHz."

What does this mean? Innovative change.

The company believes it will be a year of growth and reported first quarter revenue of $3.12 billion. According to a recent SEC 10-q filing, "We are poised for growth and share gains as markets rebound. Our product portfolio is strong, and our design position with customers is excellent. Our inventory is well-staged, and production in our factories is ramping. We expect 2012 to be a good year for growth."

Analysts agree. Wedbush Research believes the company will outperform the market.

According to Wedbush, "We believe TI's better-than-expected top-line guidance validates our view that the semi industry's recovery has begun."

  • ARM Holdings (NASDAQ: ARMH): The business of ARMH is microprocessors, physical intellectual property (IP) and other related technology and software. It also sells development tools. Most of the chips it designs can be found in smartphones and tablets.

With a market cap of $12.81 billion, ARM Holdings is in a good position to capitalize on the growing mobile market.

The company released strong first quarter numbers on April 23 and increased its full-year revenue target. In all, analysts were happy with the report while Raymond James upgraded ARMH to a strong buy from outperform.

According to Raymond James analyst Michael Rose, "We heard nothing to dissuade us from our belief that ARM remains one of the strongest secular growth stories in tech. ARM remains the de facto leader in smartphones/tablet processors, which is dovetailed by strong licensing trends in non-traditional markets such as microcontrollers, set-top boxes, disk drives, and digital TVs that will drive an incremental royalty stream over the next five years."

ARM's rivalry with Intel Corp. has intensified, but Rose sees it as "more opportunity than risk."

A bright spot in the competition is ARM's "design/multi-sourcing/eco-system" which edges out Intel's process technology/sole sourcing," noted Rose. "We remind investors that Intel's retreat from digital consumer, in our opinion, is due single-handedly to ARM momentum in that space in 2012."

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