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New Era of Chips – Products, PC and Traditional

June 22nd, 2013

New Era of Chips for SmartPhone ComputingAfter the yeras of momentum (1990-2000) and contrarian (2000-2010), we assert the market is now entering a 3rd era of chip which is composed of 3 sub-groups and label it in recognition of the leader, “product cycle era” driven by SmartPhones and Application Processors. PCs and the other left overs comprise the Traditional Chipset Group.

Product Cycle Chips – The advent of product cycle chip stocks is in practice a function of the market share dominance of Apple and Samsung. As share of these 2 customers has risen (coincident with the explosive growth of smartphones and tablets), it has created an investment category based on their suppliers. But this has risks associated as power has shifted from the chipmakers and into the hands of the customers [OEMs], specifically.

PC Chip Makers– The success of software “ecosystems” has driven growth in portable, personal, connected devices largely at the expense of the traditional PC. Spurred by the rapid growth of the Internet and an ever-increasing library of digital content, in 2004 consumers became the majority chip customers, outpacing corporations for the first time. This was marked by a period of above average notebook growth (at the expense of desktops) as individuals sought “personal” consumption devices. During this time, battery life became a focal point (portable utility) and notebook prices began to fall (lower prices required for broader adoption), ultimately culminating in the short-lived netbook.

We view this as a secular problem. The downgrade of PC names (since followed by several other downgrades by our peers), we asserted that the Win8 launch was likely to flop. While it is not absolutely certain that PC’s will forever be cannibalized by tablets, the poor start to Win8 should fuel the case.

Other / Traditional Chip Makers– As the name implies, these are chip stocks that we believe will continue to follow traditional cyclical indicators. Typically these are companies with exposure to end-markets where customers are disaggregated (industrial), penetration is low (automotive), and/or competition is limited (communications). To be sure, this group tends to have a high perceived sensitivity to macro outcomes. We cast chip stocks in these verticals in the light of traditional chip investing (analog, PLD’s communications).

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