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Zacks Industry Outlook Highlights: Apple, Intel, ARM Holdings, IBM and Cisco

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Chicago, IL - September 17, 2015 - Today, Zacks Equity Research discusses the Semiconductors (Part 2), including Apple ( AAPL ), Intel ( INTC ), ARM Holdings ( ARMH ), IBM ( IBM ) and Cisco ( CSCO ).

Industry: Semiconductors (Part 2)

Link: http://www.zacks.com/commentary/56501/semiconductor-outlook-ma-security-in-focus

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.

Now, with the basic definitions and applications out of the way, let's jump straight to the industrywide M&A.

As discussed in a previous article , semiconductor companies have always been acquisitive, but the number of startups to be acquired has gone down in recent years, impacted by increasing design costs, chip integration trends, limitations of the scope for innovation and shifting of VC funding to more lucrative areas. This has led to the acquisition of foreign startups or larger domestic companies. We have already seen three major announcements this year that are briefly highlighted below:

Avago-Broadcom: This was the merging of two highly acquisitive companies, creating the largest producer of diversified wired and wireless communications chips. The combined company was valued at $37 billion and is expected to generate revenue of $15 billion a year. It counts Apple ( AAPL ) and Samsung as major customers. Cost synergies are also expected.

Intel-Altera: Intel's ( INTC ) acquisition of Altera is intended to protect its turf in the data center and support its growth in IoT through new product categories. In the data center, Altera FPGAs can serve as accelerators to speed up processing, and can also deal with challenges from Qualcomm, which is attempting to make headway with ARM designs. Altera will continue to make chips based on ARM designs, perhaps to plug that hole for now. Intel spent $16.7 billion on the deal with expected cost synergies and better utilization rates.

Freescale-NXP: The $40 billion merger of these two companies is a play for strength in the fast-growing automotive and IoT markets. The combination will be particularly strong in auto chips, making it the leading supplier into that market, replacing Renesas. Considering the prospects in advanced driver assistance systems (ADAS) and their limited offerings for the segment right now, there could be increased focus on that. For IoT, they will target growth prospects in microcontrollers.

Acquisitions could continue given that there is certainly no loss of appetite on that count. The broad semiconductor industry however, has not changed that much in the last few months, so it is still understood best as a function of three major buckets.

Security Gains Importance in the IoT Bucket

The increased interconnectedness of things is a positive for semiconductor players because it creates a new market for chip consumption. But one big obstacle standing in the way of adoption is the increased need for security, which is leading semiconductor players to rethink their approach to this opportunity. For instance, Freescale has joined the Embedded Microprocessor Benchmarking Consortium (EEMBC) to identify embedded security gaps and set guidelines for IoT manufacturers to make more secure devices.

When Intel acquired McAfee a few years back, it said that the intention was to bake security into hardware, which was of course a high-end job. Internet of Things (IoT) is changing that now because these chips have to be cheap for very routine functions (in many cases) while offering basic security features such as support for encryption.

British semi design company ARM Holdings ( ARMH ) has acquired Israeli startup Sansa, which offers both hardware security technology and software for advanced SoCs used in the IoT market. The company will likely build some security features into its designs.

Connected medical devices, wearables, cars and corporate Intranets are particularly susceptible to attack. Additionally, persistent hacker attacks on retailers (one of the latest being Supervalu) is leading to increased demand for chip-based credit and debit cards and new payments systems.

The 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 16.9% CAGR from 2014 to 2020 at which time the market will represent $1.7 trillion. Through this period, spending will be focused on devices (31.8% of total), with networking and IT services accounting for another third. IoT platforms, application software and as-a-service offerings will grow in the share of spending thereafter.

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 or its acquisition of smart glass maker Recon Instruments.

Prime enablers of IoT growth are likely to be companies like Intel, ARM, NXP, etc. although many others will play a role. Apple's Watch has positive implications for companies like Samsung.

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. vThat's why big companies like Intel, IBM ( IBM ) and Cisco ( CSCO ) 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. There will however be increased scrutiny on privacy considerations.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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