RF Micro Devices Update BUY

RFMD : NASDAQ :

15.01 BUY 
Target: US$20.00

COMPANY DESCRIPTION:
RF Micro Devices is a leading supplier of power
amplifiers, front end modules and other RF components
for mobile devices (handsets, smartphones, tablets) and
communications infrastructure.
All amounts in US$ unless otherwise noted.

Technology — Communications Technology — Semiconductors
WELL POSITIONED TO BENEFIT FROM STRONG 2014-16 RFICTAM GROWTH AND MARGIN EXPANSION POST MERGER
Investment recommendation

Based on our analysis of global LTE
network deployments and the improving LTE subscriber growth trends,
we forecast a 20% handset RFIC TAM CAGR from 2014-2016. We believe
this strong RFIC TAM growth will be driven by a 40% LTE smartphone
unit growth CAGR with stable RF $-content/handset in LTE smartphones
during this period combined with a modest 3.8% growth in 3G
smartphones due to share shifts from 2G/EDGE feature phones to 3G
smartphones. Following the final China MOFCOM approval, we believe the
merger between TriQuint and RFMD remains on track to close by
December 31, 2014. We believe the combined company, Qorvo, will have a
broad mobile device related RFIC portfolio and is well positioned to benefit
from the strong RF TAM growth. Further, we believe Qorvo can leverage
significant cost synergies through consolidating fab facilities, optimizing
R&D expenditures, and eliminating duplicate costs. We reiterate our BUY
rating and increase our PT to $20.
Investment highlights
Anticipate 20% handset RFTAM CAGR from C’14-C’16 due to ramping LTE growth and 2G to 3G
migration; Avago, Skyworks, Qorvo and Qualcomm should benefit’  on the RFIC handset market TAM growth drivers
and technology trends.
 We believe Qorvo is well positioned to benefit from this strong RFIC
TAM growth. We also believe Qorvo could benefit from potential RF $-
content increases in Apple’s next-gen iPhone products and also grow
$-content at Samsung as this OEM focuses on fewer handset SKUs but
potentially higher RF $-content per SKU. Further, the increasing mix
of affordable LTE smartphones from Chinese OEMs could help Qorvo
grow RF $-content and improve margins as it ships higher-margin
integrated products into this base.
 We believe these trends combined with execution on the $150M cost
synergies target should result in expanding LT margins and solid EPS
growth through 2016. This in turn could drive potential multiple
expansion for Qorvo to levels more in-line with higher multiple analog
semiconductor companies trading currently at 15x C’16 EPS estimates.
Valuation

Our $20 price target is based on shares trading at roughly 14x
our C2016 pro forma EPS estimate of $1.42 for the combined company
and then assigning 50% of the value to RFMD.

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Intel Corporation HOLD

INTC : NASDAQ :

US$35.95 HOLD 
Target: US$35.00

COMPANY DESCRIPTION:
Intel Corporation is the world’s largest semiconductor
chip maker, in terms of revenue. The company develops
advanced integrated digital technology platforms and
components, primarily integrated circuits (ICs), targeted
at the computing and communications industries.
All amounts in US$ unless otherwise noted.

Technology — Hardware — Semiconductors and Related Technologies
STRONG DCG/IOTG TRENDS, STILL HEAVY MOBILE LOSSES; COMPELLING NEW PC TECHNOLOGIES, BUT
STABILITY INCREASINGLY RELIANT ON CONSUMER
Investment recommendation:

Intel’s analyst day in Santa Clara – mixed feelings as to upside to the stock from
current levels following the significant (and well-earned) appreciation over
the last 12 months. While the management team presented very strong
product portfolios and growth prospects for both DCG and IoTG, as well as
confidence to continue Moore’s Law beyond 10nm as a key differentiator,
Mobile loss forecasts for 2015 were worse than our expectation and only
modestly improved Y/Y.

Further, despite 2015 guidance for PCs that was
better than feared, market stabilization continues to become more dependent
on a recovery in consumer PC spending versus enterprise, which drove the
recent resurgence. We believe Intel is well positioned for solid earnings
growth while delivering attractive capital returns over the next few years.
However, we believe much of this fundamental strength is already reflected
in the stock given the recent appreciation, and lingering questions regarding
mobile ROI remain. We maintain our HOLD rating and $35 price target.
Investment highlights
 2015 guidance for mid-single digit revenue growth and gross margin of
62% were both slightly below our prior 6.2%/62.8% estimates, with
slightly lower 14nm yields potentially dragging down 1H/15 gross
margin. Guidance for modest Mobile revenue in 2015 with a loss still
over $3B was below our expectations for a more material improvement.
 However, key growth sectors of Data Center and IoT were guided above
our estimates for 2015. Further, management guided to slightly lower
capital spending Y/Y at $10.5B, and underpinned confidence in the longterm
business model by raising the annual dividend from $0.90 to $0.96,
bringing the dividend yield to 2.7%. Finally, while 2015 guidance for
only slightly down Y/Y sales in PCCG will be viewed as a relief to some
given an expanded channel, we wait for evidence of improving consumer
notebook sales into the headwind of the iPhone 6 upgrade cycle.
 We adjust our 2015 revenue, GAAP EPS, and non GAAP
EPS estimates from $59.3B/$2.45/$2.68 to $58.6B/$2.35/$2.57.
Valuation: Our $35 price target is based on shares trading at roughly 14x our
2015 non-GAAP EPS estimate, excluding stock-based compensation.

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YEAR END UPDATE AND FORECAST

November 2014 – 40 % cash position

Year End Review and Forecast

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Yet many in the financial industry promoted the idea of a “supercycle” fed by global industrialization and “peak oil” supply constraints. For sure, commodities look quite oversold in the short term and sentiment has turned severely against them, supporting the chances for a trading bounce or pause in the declines.

Yet even if the lows are in for oil or gold, the big picture is now looking decidedly less “super” for long-term commodity bulls. In one representative example of flagging investor interest in commodities, assets in the bellwether Pimco Commodity Real Return Strategy fund (PCRIX) have fallen below $13 billion – down by more than a third in two years.

Applied Micro Circuits

AMCC : NASDAQ : US$6.88 BUY 
Target: US$11.00

Technology — Hardware — Semiconductors and Related Technologies
SOFT NEAR-TERM SERVICE PROVIDER SPENDING IMPACTS CONNECTIVITY SALES; X-GENE AND
HELIX GROWTH OPPORTUNITIES UNAFFECTED
Investment recommendation:

We maintain our belief APM is well
positioned for long-term growth and significant operating leverage as the
first vendor with 64-bit ARM chips designed specifically for the $13B+
server market. While our legacy business estimates were Street-low into
results, lower Connectivity sales in the face of softer service provider capital
spending levels were even below our estimates. We remain cautious on
near-term legacy business trends, but continue to believe in the long-term
ARM server opportunity and HeliX design wins provide a path for embedded
sales recovery in C2016. We reiterate our BUY rating, PT to $11 from $12.
Investment hInvestment highlights
 Results/guidance recap: APM report Q2/F2015 revenue of $41.0M and
non-GAAP LPS of $(0.06) or below our estimates of $42.1M/$(0.04) due
to disappointing Connectivity sales of $24.9M, down 20% Q/Q. While we
had anticipated softer Connectivity sales for the next few quarters with
softer service provider spending (particularly in North America), SeptQ
sales and DecQ guidance were below our expectations. With 4-5 month
lead times typical in these markets, we believe a book-to-bill of 1.2x in
the quarter indicates DecQ Connectivity sales have bottomed
X-Gene ARM server opportunity unaffected

 HeliX embedded design wins provide path for C2016 base business
recovery:
:APM recently announced a family of HeliX embedded ARMv8
chips targeted at Networking, Storage, Industrial, and Imaging markets.
We believe tier-1 design wins have already been secured, and we
anticipate first material sales in Q1/C’16 should begin to regrow APM’s
embedded processor business back toward $25M/quarter run rates

Valuation:

Our $11 price target (was $12) is based on shares trading at
roughly 14x our F2017 non-GAAP EPS estimate of $0.80.

Broadcom Update :BUY Target Price $46

BRCM : NASDAQ : US$37.33
BUY 
Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies
STRONG QUARTER DRIVEN BY CONNECTIVITY GROWTH AND RESILIENT SERVICE PROVIDER
RESULTS; ALL EYES TOWARD ANALYST DAY

Investment recommendation:

Broadcom posted strong Q3/14 results with sales above our estimate driven by strong 20% Q/Q growth in Connectivity
sales with the inclusion of new 802.11ac WiFi solutions in key smartphone
launches including iPhone 6. Further, service provider sales were down only
roughly 2.5% Q/Q, better than feared given recent market commentary.
Finally, faster operating expense reductions post the decision to shut down
the cellular baseband business helped drive a solid beat on the bottom line.
We believe the stock will likely rebound post the recent sell-off in the group
and all eyes will then turn to Broadcom’s December 9 analyst day for future
growth strategy and increased capital returns commentary. We reiterate our
BUY rating and raise our target to $46 from $45 on increased estimates.

Investment highlights

 Q3/14 revenue of $2.26B was above our and consensus estimates of
$2.18B (see Figure 1) driven by a surprising rebound in baseband sales,
20% Q/Q Connectivity growth, and only a roughly 2.5% Q/Q service
provider sales decline in ING versus. Non-GAAP gross margin of 54.3%
was a bit below 55% guidance midpoint, but was very strong
considering the unexpected increase in baseband sales (roughly a 170
basis point gross margin headwind in total) and a greater mix of
Connectivity sales to large customers. We believe additional upside
exists to gross margin into 2015 for Q4/14 guidance of 55%. Non-GAAP
operating expenses were $10M below our estimate at $646M, and
management expects another $50M reduction in Q4/14 as baseband
costs continue to be wound down. Non-GAAP EPS was $0.91, $0.07
above our estimates and consensus.
 Given these significant cost savings of the baseband exit, we believe
gross margin can remain in the mid-to-high 50s and operating margin
will expand into the mid-to-high-20s during 2015. We maintain our
belief Broadcom’s core Home and Infrastructure businesses are well
positioned for solid growth and will benefit further from increased
management attention and investment post the baseband exit.

Valuation:

Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate.

Avago Technologies Limited iPhone Upgrade Target price $97

AVGO : NASDAQ : US$83.47
BUY 
Target: US$97.00

COMPANY DESCRIPTION:
Avago Technologies Limited is a designer, developer and
global supplier of analog semiconductor devices. Avago
offers products in three primary target markets: wireless
communications, wired infrastructure, and industrial and
automotive electronics. Applications for Avago products
include smartphones, connected tablets, consumer
appliances, data networking and telecom equipment, and
enterprise storage and servers.

Technology — Communications Technology — Semiconductors
RAISING ESTIMATES BASED ON STRONG IPHONE 6 CONTENT SHARE AND INCREASED IPHONE 6 ESTIMATES
Investment recommendation: Based on our analysis, industry
conversations, and recent iPhone 6 teardown reports, we believe Avago has
roughly doubled its dollar content in the recently launched iPhone 6/6 Plus
smartphones versus the iPhone 5s/5c models and has the highest RF dollar
content share among the RF suppliers. With our recent surveys indicating
extremely strong demand for the new iPhone 6 products, we anticipate very
strong Q4/14 iPhone sales and high-end smartphone market share gains for
Apple versus high-tier Android OEMs, particularly Samsung. Given Avago’s
strong dollar content in the new iPhones and our recently raised iPhone
estimates, we are raising our Avago estimates. We reiterate our BUY rating
and raise our PT to $97.
Investment highlights
 Our recent surveys and analysis indicate very strong iPhone 6 demand,
and we anticipate a record iPhone 6 upgrade cycle. Please see our
separate Apple note, published Sept. 22, titled “Monthly surveys
indicate record iPhone 6 upgrade cycle, strong market share gains,” for
our updated iPhone estimates.
 We estimate the RF front-end content in the iPhone 6/6 Plus increased
to roughly $15.25-15.50 per device versus $11.25-11.50 in the iPhone
5s/5c models due to increased LTE band support and features such as
envelope tracking and carrier aggregation. Due to the increased
number of higher-frequency bands supported that require FBAR filters,
we believe Avago increased its RF dollar content to roughly $6/iPhone 6
models versus roughly $3 in the iPhone 5s/5c.
 While we believe Avago has growing dollar content in other flagship
Android smartphones such as Galaxy Note 4, Avago has stronger dollar
content share in the iPhone 6 devices given Android smartphones tend
to support more regional LTE SKUs. Therefore, we believe Avago will
benefit from strong iPhone 6/6 Plus sales despite our recently lowered
Android estimates due to share losses to the iPhone 6 products.
 Given these trends, we raise our F2014/15 Wireless business sales
estimates, resulting in our F2014/15 pro forma EPS estimates
increasing from $4.63/$6.35 to $4.65/$6.45
Valuation:

Our $97 price target (was $95) is based on shares trading at
roughly 15x our F2015 pro forma EPS estimate.

Broadcom

 

BRCM : NASDAQ : US$38.26

BUY 
Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies
INCREASINGLY CONFIDENT IN EXPEDITED
CELLULAR BASEBAND EXIT; CONCLUSIONS FROM MANAGEMENT MEETINGS

CEO Scott McGregor at
Broadcom’s HQ. – with stronger conviction that an exit
of the cellular baseband business will happen quickly and therefore are
more confident in our 2015 pro forma estimates excluding the baseband
business. We discuss drivers of solid growth for Broadcom’s retained
businesses and areas for incremental investment with cash recouped
from prior cellular baseband investments. We reiterate our BUY rating
and raise our price target to $46, as we assume our pro forma EPS
estimates post the baseband exit as the basis for our price target.
Investment highlights
 We assume a baseband business exit before the end of 2014. Given
the much lower gross margin of the baseband business likely lost
during this transition and the significant operating cost savings, we
believe gross margin can expand into the mid-50s and operating
margin will expand into the mid-to-high-20s exiting 2015.
 We believe Broadcom’s core Home and Infrastructure businesses are
well positioned for growth and could benefit further from increased
management attention and investment post the baseband exit. In
fact, we believe Broadcom’s Home business should grow in the mid-
to high-single digits with solid mid-20s operating margins. Further,
we believe the Infrastructure business is positioned to exceed 10%
top-line CAGR over the next several years, with operating margins
moving toward 40%.
 With our increasing confidence in an expeditious cellular baseband
exit, we are adopting our 2014/15 pro forma revenue and non-GAAP
EPS estimates of $8.4B/$2.58 and $8.3B/$3.28. Our estimates largely
exclude any additional initiatives that could be funded with
incremental investments from the baseband business exit.
Valuation: Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate of $3.28.

Advanced Micro Devices Update

AMD : NYSE : US$4.06

BUY 
Target: US$5.00

 

Technology — Hardware – Semiconductors and Related Technologies
EARNINGS RECOVERY DRIVEN BY DIVERSIFIED
GROWTH, FOCUS ON OPERATING MARGINS; RESUMING WITH BUY, $5 PRICE TARGET
Investment recommendation:

We believe AMD’s diversification strategy
positions the company to drive solid top-line growth and a return to
sustained profitability despite PC market headwinds. In fact, we are
comfortable with the lower gross margin of recent sales, with shared R&D
costs and minimal marketing expense for semi-custom gaming designs
making this new business accretive at the operating line. Long term, ARM
servers offer opportunity for re-entry into a growing $12B+ market and an
attractive call option on AMD shares. Nearer term, we believe consensus
underestimates GPU share gain and new semi-custom opportunities.

 

We resume coverage of AMD with a BUY rating and $5 price target.

Investment highlights
 Diversification strategy: Reduce PC exposure from 90% in 2012 and
70% today to 50% exiting 2015 by investing in five key growth markets

Concerns: Risks of a re-accelerating secular decline in PCs remain as
AMD is still roughly 70% exposed. Sustainability of strong semi-custom
console launches at Sony and Microsoft needs to be proven. Pursuit of
ambidextrous ARM/x86 strategy could distract focus, limit features of
individual designs, and potentially cause operating expense growth.
 We introduce our 2014/15 revenue and non-GAAP EPS estimates of
$6.07B/$0.22 and $6.31B/$0.32, respectively.
Valuation: Our $5 price target is based on shares trading at roughly 16x
our 2015 non-GAAP EPS estimate.

 

NVIDIA Corporation Update

NVDA : NASDAQ : US$19.03

HOLD 
Target: US$19.00 

 

Technology — Hardware — Semiconductors and Related Technologies
WAITING TO GAUGE GROWTH POTENTIAL FROM SEVERAL EMERGING OPPORTUNITIES, INCLUDING IPR; RESUMING WITH HOLD, $19 TARGET
Investment recommendation: We believe NVIDIA’s transformation from a
PC-leveraged GPU supplier to a growing, diverse visual-computing company
is complete. In fact, with focused investments in gaming and professional
tiers, PC platform GPU sales are still growing despite market headwinds.
Layering on new GPU applications in emerging markets including big data
analytics, GRID, and automotive, we believe NVIDIA is well positioned for
solid core growth. However, these new markets are still nascent and could
take time to drive meaningful growth considering the need to replace a large
patent settlement revenue stream expiring in 2017. Given the recent share
price move and this overhang to operating earnings, we cannot justify a
premium multiple. We resume coverage with a HOLD rating and $19 target.
Investment highlights
 Growth drivers: GPU sales should continue to outperform the PC sector
by focusing on premium gaming and professional development tiers. In addition, investments in software and Shield position NVIDIA strongly for emerging Android gaming platforms. New opportunities to leverage
NVIDIA’s core GPU technology in automotive and mobile (Tegra), cloud
virtualization (GRID), and high performance computing (Tesla)
applications are compelling and should generate high margin and sticky
revenue streams as these markets mature.
 Patent licensing strategy to replace current IPR stream yet to be proven:
Management is confident in plans to more broadly monetize NVIDIA’s
portfolio of over 7K patents. However, with a current IP settlement
stream from Intel of $66M/quarter set to expire in 2017, NVIDIA’s new
IP licensing program is tasked with replacing a substantial portion of
the company’s operating earnings. Until investors are given clarity
around timing and scope of future IPR, we believe NVDA shares could
have limited upside despite solid prospects for core and new business
growth, diligent expense controls, and more aggressive capital returns.
 Estimates: We introduce our F2015/16 revenue and non-GAAP EPS
estimates of $4.56B/$1.18 and $4.75B/$1.29, respectively.
Valuation: Our $19 price target is based on shares trading at roughly 15x
our F2016 non-GAAP EPS estimate

 

ARM Holdings Raising Target Price $ 60

ARMH : NASDAQ : US$48.48
ARM : LSE
BUY 
Target: US$60.00 

 

COMPANY DESCRIPTION:
ARM is a leading semiconductor IP supplier to the diverse global
semiconductor market. ARM’s revenues are driven through a
licensing and royalty business model, with a majority of the
royalty sales driven by the mobile market including handsets,
smartphones, and tablets. ARM also supplies semiconductor IP to
the server, PC, and embedded markets and physical
implementation libraries and IP to semiconductor foundries.

Technology — Communications Technology — Semiconductors
INVESTOR CALL WITH MANAGEMENT; ARMV8
SHOULD DRIVE ROYALTY RATE EXPANSION
ACROSS MULTIPLE MARKETS, TIERS
Investment recommendation:

We participated in an open investor call on ARMv8 with Nandan Nayampally, ARM’s VP of Marketing for the CPU Group.
This note summarizes key points from the call. Since Apple’s A7 processor
announcement in September, the evolution of the 64-bit ARMv8 ecosystem
within the mobile market has progressed even more quickly than we had
anticipated. In fact, following Qualcomm and MediaTek both announcing
broad ARMv8 mobile roadmaps at MWC to include mid-tier smartphone
chips, we believe the path toward 64-bit smartphone/tablet ubiquity across
all tiers is well underway. Further, we believe ARMv8 opens new markets
including server and enterprise networking where ARM is less than 10%
penetrated today and ASPs tend to be much higher than in mobile. Given our
belief that near-term mobile royalty seasonality is well understood and
reflected in consensus estimates, we recommend investors accumulate ARM
shares ahead of reaccelerating royalty growth trends during 2H/14 and
2015. We reiterate our BUY rating and raise our price target to $60.
Investment highlights

 We believe ARM’s newest architecture, ARMv8, will both materially
increase the base royalty profile of ARM’s incumbent markets and open
new and equally large market opportunities including server and
enterprise networking where ARM has minimal market share today and
that should yield royalty rates at 2%+, or above the corporate average.
 In addition, given we believe ARMv8’s licensing applicability could be
broader than ARMv7 with the inclusion of these new markets, we believe
ARMv8 is still in the early innings of the licensing opportunity with
roughly 30 licenses to 20 companies today where ARMv7 has been
licensed 130+ times to roughly 80 companies.
 Our more detailed analysis of the ARMv8 architecture, including its
features and market applicability, and incremental licensing and royalty
revenue opportunities for ARM, is discussed at length in our September
19th ARM 64-bit white paper titled “ARM’s 64-bit smartphone coup:
Apple accelerates timing for higher royalties”.
Valuation: Our $60 price target is based on shares trading at roughly 38x our
2015 normalized EPS/ADS estimate and our royalty stream DCF.

Analog Devices

ADI : NASDAQ : US$51.23 
BUY  Target Price $ 60

COMPANY DESCRIPTION:

Analog Devices designs, manufactures and markets high- performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in industrial, communications, computer, and consumer applications .target: US$60.00

Technologies DIVERSIFICATION CONTINUES TO PAY OFF

ADI delivered a little upside for EPS last night and guided modestly better than the Street as all verticals except consumer ran ahead of expectations. With the better mix, gross margins were a positive surprise as was EPS. CQ1 guidance calls for more of the same as well as better revenue. With a dividend hike and $1b buyback in place, we believe ADI continues to offer defensive exposure to semiconductors at a time when growth for the industry remains in question. We are reiterating our BUY and increase our price target to $60 from $55.
We are increasing our estimates and price target largely on better gross margins. For CQ1, EPS is now expected to be $0.56 up from our prior estimate of $0.49, while revenues remain roughly $2.6B. EPS for C2014 is increased slightly to $2.40 from $2.39 while revenue remains roughly $2.8b. Our price target is increased to $60, or roughly 20x C2014 EPS plus $12.07 net cash per share.
Broad upside minus consumer ADI’s revenue was better than expected across its Industrial, Automotive, and Communications segments, while Consumer was weak. The most significant upside came from Communications where the company sells into wireline and wireless equipment and avoids lower margin smartphone ICs. We believe a strong capex cycle for wireless basestations could deliver revenue and earnings upside versus our revised estimates.