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Zacks Industry Outlook Highlights: Apple, Microsoft, Cisco and IBM

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For Immediate Release

Chicago, IL - September 09, 2016 - Today, Zacks Equity Research discusses Semiconductors, including Apple ( AAPL ), Microsoft ( MSFT ), Cisco ( CSCO ) and IBM ( IBM ).

Industry: Semiconductors

Link: https://www.zacks.com/commentary/90023/semiconductor-industry-outlook---september-2016

Some disruption is afoot in the enterprise segment because of the work done by the Open Compute Project (OCP) that Facebook founded and continues to feed. The social networking company generates huge volumes of data that it needs to store, manage and process as quickly and cost-efficiently as possible.

Others with similar interest like Apple ( AAPL ), Microsoft ( MSFT ) and Google, and differing interest like Cisco ( CSCO ) and Juniper also joined in. Facebook designs the chip that is then optimized by the OCP so it becomes something members can standardize on. So far so good. But if the OCP is able to design chips that perform better or comparably with Intel (INTC) chips, the chip maker's cloud business can be hurt. This explains why Intel is part of the effort.

But Intel has other challengers too. IBM ( IBM ) has made some progress in chip design that Google seems to be testing out. Google is reportedly the only top chip buyer that doesn't sell servers but instead builds them for internal use. And the company is now also seeking growth in the IaaS segment. Therefore, Google's decisions are extremely significant in the chip consumption context.

Google has done two things in the recent past that could be viewed as second sourcing or maybe creating leverage against Intel to lower prices. The company has declared that everything it now does also supports IBM's Power systems and it is also hobnobbing with Qualcomm ostensibly to use some of its fledgling ARM-based server chips.

Amazon is the leading provider of cloud infrastructure followed by Microsoft, IBM and Google. This is another chip-hungry segment with long-term demand for the devices. This is perhaps the reason that some time back, Amazon started dabbling with low-end ARM-chips. The company looks interested in making its own devices, but it's still too early to comment on its progress.

Intel's only course of action is to innovate around the problem (increasing performance while reducing cost per watt is a way it could do this). After all, it's hard to convince people that you deserve to make a nice margin. Another significant development is Intel's decision to license ARM technology perhaps to support its foundry business, or help it speed up its IoT effort, or maybe even to use in some segments of the cloud computing market.

Microsoft seems allied with Intel for now although we don't know how that story will play out since it's also a member of the OCP.

Another important segment for semiconductor companies that is relatively low-key is Industrial . Since semiconductors facilitate increased automation on the factory floor, they are increasingly used to drive efficiency and lower cost. Reportedly, PricewaterhouseCoopers (PwC) expects the industrial semiconductor market to grow at a CAGR (compounded annual growth rate) of 9.7% between 2014 and 2019.

IC Insights estimates that global medical semiconductor sales will grow at a 12.3% CAGR to reach $8.2 billion in 2018. It's not clear if this estimate includes wearables that are normally considered IoT and therefore included in consumer. Wearables carry an increasing amount of medical information and consume a good number of semiconductor devices.

One of the fastest-growing emerging markets for semiconductor devices is automotive , as the consumption of electronic components for safety, infotainment, navigation and fuel efficiency continues to increase. Semiconductor consumption in this market was worth around $7 billion in 2015, according to Reportlinker.

Primary areas of strength are hybrid electric vehicles, telematics and connectivity, and advanced driver assistance systems (ADAS), where the estimated 5-year CAGRs for chip demand are 20%, 19% and 18%, respectively. Infineon, STMicroelectronics, Renesas, Freescale, Texas Instruments and Spansion (owned by Cypress) are major players. Analog Devices, with its ADAS technology, is also a beneficiary.

The market, which saw some consolidation last year, is expected to grow 3.7%. Similar to wearables, the auto market also has an emerging adjacent market in the form of autonomous/self-driving cars that will consumer a huge number of semiconductors, particularly the sensors, processors and other technology enabling the vehicles.

Wireless infrastructure builds have been necessitated by increasing data volumes and connectivity issues (network congestion, power reliability, privacy and security) in wireless networks. These builds will require increased investment in semiconductors thus driving sales.

The PC market still consumes a large number of chips but its importance as a driver continues to decline. That's because the market itself is shrinking (Gartner estimates that it declined 5.2% in the second quarter while IDC estimates that it declined 4.5%).

The encouraging things here are that first, both firms estimate that North America returned to growth last quarter and second, there is a chance of a stronger, Windows 10-driven second half particularly at enterprise customers. The consumer business won't strengthen as much because consumers are hesitant to spend on upgrades given that they already have many more devices than they need and because Internet and many other conveniences of computers are now easily available on smartphones and tablets.

In either case, it's very clear that the steady growth seen in previous years is history. IDC expects the PC market to shrink 7.2% this year and 2.1% in 2017. So semiconductor players with PC market exposure can at best profit from market share gains, BYOD exposure and increased exposure to the top PC vendors, which are Lenovo, HP, Dell, Asus and Apple according to both IDC and Gartner.

Apple makes its own PCs, software and also a lot of its own chips, relying largely on Intel, Qualcomm and Samsung for its other semiconductor requirements. Microsoft makes software and limited quantities of hardware, relying largely on third-party device makers for chips, PCs and mobile devices. It's also a major player in the cloud, which makes it an important ally for semiconductor companies like Intel. Alphabet's chromebooks on the other hand are made by a number of hardware makers that use either Intel or ARM technology.

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