Zacks Industry Outlook Highlights: Intel, NVIDIA And Advanced Micro Devices

For Immediate Release

Chicago, IL – December 12, 2017 – Today, Zacks Equity Research discusses the Semiconductors, including Intel (NASDAQ:INTC) , NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) .

Industry: Semiconductors

Link: https://www.zacks.com/commentary/139829/semiconductor-industry-outlook---december-2017

This year is expected to be robust for the semiconductor industry, not just because of surging demand in some new and existing end markets but also because of supply constraints in key product categories that have led to very strong pricing.

As a result, worldwide company rankings (in terms of sales dollars) are moving around quite a bit. In 2017, IC Insights expects Intel to relinquish the top position to Samsung (KS:005930) for the first time since 1993. S K Hynix, Micron, Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM), Texas Instruments (NASDAQ:TXN), Toshiba, NVIDIA and NXP are the others making it to the top 10. This means that both Hynix and Micron will jump a couple of spots and NVIDIA will break into the top 10 for the first time.

The integrated circuit market comprised 81.6% of the total semiconductor market in 2016 according to WSTS data, so it bears significant influence on total market performance. Integrated circuits are expected to grow 22.9% this year after negligible growth in 2016, but growth rates will drop off to 7.0% in 2018.

As evident from the above chart, the memory category within integrated circuits is making waves this year, although the growth rate isn’t expected to sustain through 2018 as demand-supply imbalances are reduced. For 2017, DRAM ASP growth of 77% will push DRAM market growth of 74%, the highest growth rate since 1994. DRAM will be the single biggest category within semiconductors in 2017. The NAND flash ASP will grow 38%, supporting a 44% increase in the NAND flash market. This will lead to memory market growth of 58% this year, followed by another 11% increase in 2018.

The discrete, optoelectronics and sensor categories are also expected to look up this year. According to IC Insights, discretes will grow 10.3% despite commoditization with power transistors (half of all discretes worldwide) growing 9.0%. The 8.1% growth in optoelectronics will be driven by strong double-digit sales increases in CMOS image sensors (+22%), light sensors (+19%), optical-network laser transmitters (+15%) and infrared devices (+14%). The 17.5% growth in sensor/actuator sales will come on the back of strength in actuators (+20%); pressure sensors, including MEMS microphone chips (+18%); and acceleration/yaw sensors (+17%).

The primary end market driver of growth for these components is IoT, supported by intelligent embedded controls within devices and some inventory replenishment in commodity discretes.

In the Zacks universe, the semiconductor industry is made up of 15 sub-sectors (including 4 for semiconductor equipment) organized under the Technology sector, which is one of the 16 broad Zacks-categorized sectors.

Similar to the Technology sector, Zacks also breaks down each of the other sectors into groups such that there are a total of 255 sub-sectors or industries. These “X” industries are then grouped in two: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (industries with the worst average Zacks Rank). Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (Click here to know more: About Zacks Industry Rank)

Therefore the Zacks Industry Rank is a good indicator of investment opportunities within an industry at any given time. Moreover, because stocks in the same X industry have certain common positive or negative factors affecting them, it has been observed that there is some positive correlation between them.

Earnings Trends at a Glance

One of the main factors driving the Zacks Rank for individual stocks is earnings results. Therefore, it makes sense to take a look at how those have been in the last-reported quarter.

From the latest earnings trends report, we see that 98.4% of technology stocks have reported third quarter results with both top and bottom line averages bettering the S&P 500. Overall, technology stocks’ earnings were up 20.9% from the year-ago quarter on 8.6% revenue growth. This compares with earnings and revenue growth of 17.1% and 7.7%, respectively in the second quarter. Also, 77.0% of technology stocks beat earnings estimates compared to 72.5% for the S&P 500. The beat ratio for revenue was even higher at 85.2% with the S&P 500 averaging much lower at 67.2%.

Primary End Markets

IC Insights has categorized the electronics systems being manufactured globally this year with an estimated total value of $1.49 trillion.

The research firm says that while communications and computing are the biggest consumers of electronics systems this year, automotive is the fastest growing part. As a result, automotive ICs are expected to grow 22% in 2017 followed by 16% growth in 2018. The consumer IC market will grow 2.4% in 2017. While computing ICs will grow 25% in 2017, it will be mostly because of higher DRAM and NAND flash prices.

End Market Commentary

The miniaturization and integration of semiconductors has given rise to smaller, lighter and more portable devices like tablets, smartphones and the emerging self-driving and IoT devices. This, along with increased digitization of work and leisure activities, has led to huge data volumes. The creation and analysis of this data has led to artificial intelligence systems that are having an increasing impact on business decisions and consumer experience.

Communication chips are required at every stage of this process, so they are very important and growing component of the semiconductor market. IC Insights expects that electronics systems used in communications activity will grow at a 4.2% CAGR from 2016 through 2021. The Asia/Pac region will grow the strongest this year, producing 69% of all communications chips.

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. New materials (a compound of two or more) are being used in this segment with Galium Nitride gaining share of RF high-power semiconductors, according to ABI Research.

According to Strategy Analytics, the greatest driver of these compound semiconductors is the convergence of voice, video and data networks that is leading to the explosive growth of data traffic across wireless devices, within fixed and wireless networks, in driver assistance systems, in network-centric battlefield philosophies, solid-state lighting and high-power electronics. The firm expects compound semiconductor revenue to grow at a 13% compounded average annual growth rate (CAAGR) to double revenue to $11 billion by 2020.

Sheer computing power is a bigger requirement of the data center segment, where cloud computing and HPC are the drivers. The PC market is almost at a standstill, except for gaming PCs and laptops.

In the data center, Intel flourishes on the enterprise side and NVIDIA on the HPC side. Since HPC is required for machine learning that will have a far greater impact across industries, Intel would like a toe hold. So it has recently partnered with long-time rival Advanced Micro Devices to create a system based on Nervana architecture, marrying computing power with graphics computing power and 3D XPoint memory that it says will be able to match or better NVIDIA solutions. But that is easier said than done since NVIDIA has a huge lead and will do more to expand that lead.

Customer relationships are also an important thing, since the more data a machine learning system processes the better it becomes. Both Intel and NVIDIA are working on hybrid solutions because GPUs do a better job of processing the huge amounts of data to train a neural network while CPUs do a better job of applying that data to a given situation. Xilinx (NASDAQ:XLNX) is another important player working with FPGAs on top of ARM-based chips. With a $16 billion artificial intelligence market (according to marketsandmarkets) by 2020 waiting to be tapped, it’s no wonder that players are going all out to grab their share.

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