NEW YORK ( Karvy) -- Nova Measuring Instruments ( NVMI), Rudolph Technologies ( RTEC) and Nanometrics ( NANO) are three semiconductor stocks with potential upside based on strong company and industry outlooks.

Revenue growth for the chip industry is estimated at 4.6% for 2011, surpassing the $300 billion mark for the first time, says a report from Gartner. The research firm adds that the industry will grow annually at the rate of 31.5%.

During 2010, the top 10 original equipment manufacturers accounted for almost $104.3 billion, or one-third, of the total semiconductor vendors' worldwide chip revenue, reflecting a 33.7% year-over-year increase. Looking ahead, Gartner expects the growth rate to multiply as companies seek newer opportunities and as they foray into innovative product markets.

For future growth, Apple ( AAPL) plans to invest in the TV market through shipping new Internet protocol set-top boxes. Google ( GOOG) is seeking to extend its platform business to the TV market. Gartner believes that the TV service platform will be a key growth segment in the upcoming years.

During its fourth quarter, Intel ( INTC) announced plans to accelerate investment in production lines by almost $3 billion to a total of $9 billion, or 73% more than the investment made in the prior year. The announcement has apparently boosted suppliers of equipment and systems for Intel's fabs, or locations where wafers are processed.

However, not only will direct suppliers benefit from Intel's announcement but also all the suppliers in the semiconductor value chain.

Standard & Poor's, meanwhile, raised its recommendation for the semiconductor industry to positive from neutral and increased its growth rate forecast for 2011 to 14% from 3%.

Nova Measuring is a designer, developer and producer of integrated process control metrology systems. The company also supplies its metrology systems to worldwide semiconductor manufacturers, either directly or through process equipment manufacturers. All the analysts covering the stock recommend a buy with a 10.9% upside from current levels. Rodman & Renshaw initiated coverage on Nova recently with an outperform rating.

After Intel's fourth-quarter earnings announcement, Gabi Seligsohn, president and CEO of Nova, said the announcement was a "very strong signal about how the semiconductor market will look in 2011." He added that Intel's expanding investments will affect the entire industry's value chain as Intel represents a certain kind of processor within which there are many other processors. Therefore, if the output of one increases it implies that the entire industry produces more and stands to gain significantly.

Nova manufactures and markets stand-alone metrology platforms and advanced integrated solutions for the semiconductor industry. The company targets to achieve quarterly revenue of $40 million by 2013 with a net profit margin of 20% to 25% and a gross profit margin of 55%. Nova, which supplies its products to chipmakers in high-growth segments like Apple's iPad and smartphones, reported third-quarter revenue of $24.2 million.

Over the next 12 to 18 months, Nova plans to expand its share of addressable markets in the existing segments by focusing on high-margin products for generating substantial free cash flow to invest in the subsequent growth phase. In 2011, the company is seeking to expand into 3D integrated circuits by shipping evaluation units to customers; revenue is seen generating in 2012 with a significant surge in 2013. Nova expects research and development expenses to surge by almost $1.5 million per quarter.

The company recently signed a $17 million contract with Taiwan Semiconductor ( TSM). In early January, Nova received orders worth $10 million for its integrated and standalone metrology tools from one of the company's strategic foundry customers, with shipments scheduled for the first and second quarters of 2011. The customer's identity, which Nova has not disclosed, is U.S.-based GlobalFoundries, market sources believe. Nova adds that the foundry segment is a key player in leading-edge end markets like tablet computers, smartphones and cellular infrastructure. Looking ahead, this market segment is seen having robust growth markets, thereby benefiting high-end semiconductor equipment investments.

The U.S. investment advisory firm Caris foresees tablet PC sales surging 226% to 54 million units in 2011 from 2010. An Accenture survey finds smartphone purchases are likely to increase in 2011 by almost 26%.

>Rudolph Technologies designs, develops and manufactures process control equipment for the semiconductor industry, serving the metrology, defect inspection, and data analysis segments. The company's products are used in both wafer processing (front-end) and final manufacturing stages (back-end). Of all the analysts covering the stock, 75% recommend a buy while the remaining suggest a hold. Consensus estimates from analysts polled by Bloomberg reveal an 18.6% upside from current levels.

Rudolph dominates the metal metrology market with a 90% to 95% share. The company recently announced plans for collaborating with a process tool supplier and an IC device manufacturer for the development of 3D semiconductor packaging applications. Furthermore, the first two revenue generating Rudolph F30 inspection modules will be shipped during the first quarter of 2011.

The company confirmed in early January that it has received multiple orders for its NSX Inspection System from a Europe-based semiconductor manufacturer. This equipment will be used in back-end manufacturing at key points in the process. Shipments will begin in the first quarter of 2011 and will continue through the second quarter.

Rudolph is scheduled to release its fourth-quarter results on Jan. 31. For the fourth quarter, the company estimates revenue to range between $53 million and $56 million with GAAP earnings per share to come in between 28 cents and 33 cents. For 2010, Rudolph foresees revenue between $194 million and $197 million and GAAP earnings per share between 84 cents and 89 cents.

Subsequent to the company's moving its New Jersey manufacturing operations into its Minnesota facility, Rudolph is seen generating annualized cost savings of almost $3 million. Therefore, in the longer term, the company expects to report margins in the range of 52% to 54%.

Rudolph generates a major portion of its revenue from outside the U.S.; Asia contributes a significant 37%. Rudolph is likely to benefit from the Asian markets in the future as Gartner expects the semiconductor capital equipment market in the Asia-Pacific region to outpace other regions over the next five years. The market share of Asia-Pacific in the global semiconductor market is likely to reach 43% by 2015, IDC estimates.

Nanometrics supplies advanced process control metrology systems used in the manufacture of semiconductors, solar photovoltaic cells, high-brightness LEDs, advanced wafer-scale packaging, and silicon wafer and data storage industries. Of the total number of analysts covering the stock, 60% recommend a buy while the remaining suggest a hold. Analysts polled by Bloomberg estimate a 20.9% upside from current levels.

IDC estimates the consumer electronics chip market is likely to grow by 10% in 2011, while CAGR for the the 2010-2015 period is seen at 5%.

A supplier to Intel's fabs, Nanometrics has generated attractive results in the past few quarters with sales growing from 12% to a recent 109%. Meanwhile, Nanometrics has reaffirmed its positive business outlook for 2011 with estimated earnings of $1.18 a share on revenue of $185.62 million.

The company is scheduled to release its fourth-quarter results on Feb. 10. It forecasts its 2010 earnings per share to come in at $1.08 on revenue of $155.25 million. During the first three quarters of 2010, Nanometrics recorded an average revenue growth of 182%.

Nanometrics recently confirmed receiving an order from a major semiconductor company in Japan for a complete suite of its optical critical dimension products in support of capacity expansion for devices at the advanced process nodes. Nanometric's CEO said the company has been working with this Japanese customer for the cooperative development of their technology roadmap and expects this relationship to expand further in 2011.

Additionally, a leading semiconductor foundry has placed an order with Nanometrics for a UniFire 7900 metrology system for advanced 3D wafer-scale packaging process control. The initial system was scheduled for delivery in the fourth quarter of 2010 to enable the foundry's transition from development to high-volume manufacturing in 2011.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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