Global semiconductor sales rose 2.7 percent in September from the prior month, according to the Semiconductor Industry Association. Sales were equal to $25.75 billion last month and the President of the organization Brian Toohey, described the September data represented an optimistic close to the third quarter. Semiconductor stocks have been on something of a roller coaster ride this year as the tenuous state of the global economy and supply chain interruptions have prompted volatility within the sub-sector.
Sales in the Americas for last month were up 0.7 percent while European sales added 2.1 percent, recovering from several months of weakness leading up to it. Asia Pacific sales grew by 3.2 percent while Japan saw the largest increase in sales with 4.2 percent improvements as the nation begins to recover and rebuild from the earthquake and tsunami that struck earlier this year.
The rise in semiconductor sales could potentially create a buying opportunity in the sector and the broader market pullback on Monday only maximizes the potential margins available. Harsh Kumar, a managing director at Morgan Keegan, provided his insight on the strongest options within the field. Kumar offered both a short-term and long-term pick.
Chipmaker With Near-Term Momentum
Kumar’s pick for the short term was RF Micro Devices (RFMD). RF Micro Devices has not been immune to the obstacles facing chips, and the company’s quarterly profit exhibited the extent to which they had been impacted. Looking forward though, RF Micro Devices has the potential to experience tremendous growth.
RF Micro Devices creates power amplifiers for the cell phone and Kumar believes they are the best in the business.
“The one-line tag for this company is that they are shedding Nokia as their largest customer and embracing some of the more cutting edge players such as Samsung (SSNLF), RIM (RIMM),” he said. RF Micro Devices is also selling to a company that works heavily with Apple (AAPL).
“In effect, for the longest time they gave a lot of attention to Nokia and now they’re reaching out to cutting-edge smartphone makers.”
The shift toward more advanced smartphone makers overlaps with macro trends of growing mobility, broadband data and energy efficiency that could potentially provide the company with company significant long term growth opportunities. Simultaneously, RF continues to expand their product offerings and customer base.
"We absolutely feel that they have the best product in the market place and we believe that will help them in the December quarter,” said Kumar.
Semi Stock for Long-Term Potential
Long term, he identified the analog company Semtech (SMTC) as a stand out option in the sector. Semtech is a unique analog company in that while it offers the inherent stability of analog, it has more growth opportunities than its competitors.
A leading supplier of high-quality analog and mixed-signal semiconductors, the company has in Kumar’s words,” found growth over and above the analog industry by making the transition into optical.”
Kumar forewarns that while optical is growing the pace of that growth is still measured.
“In the next year optical is not growing much but it will probably be up greater than 30 percent year-over- year,” he said.
In addition to the shift towards optical, Semtech has a new management team that has redirected assets toward growth areas and changed the long-term trajectory of the company.
“You get the stability and the cash flow but with a little extra, because of the growth direction that stock has taken,” he says. “The stock is currently trading around $25 and we think it’s worth at least low thirties to mid-thirties.”
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