Wall Street has a disquieting tendency to home in on
and ignore everything else in chipland. That's certainly been the case over the past few weeks, amid the noise leading up to Intel's closely monitored midquarter update after the bell Thursday.
The stock lost ground after Intel said its
microprocessor business has been a little weak, with shares recently down 1.6%, or 48 cents, to $29.17. Many other chip names dipped in sympathy. The Philadelphia Stock Exchange Semiconductor Index was off 0.5%.
But the selling may offer a decent time to take a look at stocks besides the 800-pound Intel. With the improving chip cycle expected to play out for at least another couple of quarters, plenty of other stocks can expect to take part in the same profit expansion and robust sales growth seen by the industry leader. Most tech pundits expect overall 2004 chip-sales growth to best the industry's 18.3% revenue growth in 2003, when industry sales totaled $166 billion.
Granted, plenty of money managers
consider Intel itself a smart buy at current levels. But Intel's business still hinges largely on the fortunes of the computer hardware market, and management counseled investors Thursday not to expect any sudden acceleration in enterprise computer buying. So it's not surprising that investors who want to bet on the chip rebound have diversified into many kinds of chip plays, both in large-caps and smaller outfits.
Money manager Sunil Reddy owns Intel as a large-cap tech play in the
Fifth Third Quality Growth fund he co-manages. But in his separately managed
Fifth Third Technology fund, he has stakes in chip holdings geared to other markets, such as communications. "I think the communications end market still hasn't seen the strength it will see -- there have been only one or two quarters of stabilization," he said.
One likely beneficiary is
, which has already seen a bounce from strengthening demand in the communications sector that accounts for half of its revenue. After three flat quarters in a row, Xilinx said December quarter sales in the communications sector grew 20% sequentially. The company easily surpassed Wall Street sales estimates when it issued guidance in January, and it sweetened the outlook a little
In February, Xilinx's CFO noted in a
interview that Wall Street expects the company to post revenue growth of 27% between its fiscal year 2004 and 2005, above the projected growth rate of 20% to 23% for the semiconductor industry overall.
To be sure, it's not a bargain. Back in January, plenty of analysts
tagged the stock as too pricey. Though it's since traded down a few bucks, the stock is still up over 7% year to date; it changes hands at 55 times the consensus earnings estimate of 75 cents for 2004 and 37 times next year's $1.12 estimate. Xilinx shares were recently down 63 cents, or 1.5%, to $40.77.
The bullish case: Xilinx earnings are projected to jump 50% in 2005. "The valuation is still a little challenging on some telecom semi companies, but hopefully they'll grow into them," said Reddy.
A more diversified bet is
, which makes analog chips that sell into everything from industrial industries to medical, communications and consumer markets. Last month ADI's sales guidance
tromped analyst expectations and CEO Jerald Fishman said the company had the best visibility it's seen in "many quarters."
Based on Thursday's close of $51.01, the stock trades at a price-to-earnings ratio of 35 times fiscal year 2004 consensus earnings of $1.45, and 26 times estimated 2005 earnings of $1.97. ADI shares were recently down 52 cents, or 1%, to $50.49.
Reddy, who is long ADI in his tech fund, believes it can show more operating leverage. The company already has made impressive gains on that front. ADI's operating margins jumped to 24.1% in the January quarter, up from 15.8% in the year-ago period.
is another candidate for further margin expansion. Gross profit margin stood at 43.1% at the end of December, up 7.3 percentage points from year-ago levels. Banc of America analyst John Lau upgraded the stock from neutral to buy on Tuesday, saying an improving pricing environment should help lift margins further. With the company just heading into the first quarter of its fiscal year 2004, Lau predicted it could exit the year with margins slightly above 47%.
Bucking Friday's selling pressure, Texas Instruments was recently up 29 cents, or 0.9%, to $31.41.
Money manager Robert Lee, who holds TI in the
Sentinel Flexcap Opportunities fund, points out the stock currently trades at 33 times this year's consensus earnings of 95 cents and 24 times next year's earnings of $1.30. "It looks like earnings will be up close to 30%. And if you can buy a stock with a P/E below the growth rate, it looks pretty interesting," said Lee.
Lee also has recently added to a stake in
, which makes chips used in flat-panel TVs and computer monitors. With a market cap of $534 million, the stock is a big small-cap (or small mid-cap), and offers the corresponding rapid growth profile. Earnings are projected to vault from 20 cents in fiscal year 2004 to 63 cents in 2005.
Lee thinks the shares, recently down 54 cents, or 3.1%, to $16.75, have another 10% upside.
Another name Lee is long is
, which makes chips used in digital cameras and camera phones. It trades at about 21 times 2005 earnings, which are projected to leap 58% to $1.42. Lee thinks the stock could have at least 15% upside.
But investors should be prepared for volatility. Adjusted for a stock split, just this year Omnivision shares dipped to as low as $22.96 in early February before rebounding to Thursday's close of $29.59 -- a jump of 29%. The shares were recently down 52 cents, or 1.8%, to $29.07.
Valuation is a wild card for almost all chip plays. After all, the earnings portion of forward-looking P/E ratios is notoriously susceptible to change, as analysts continually jigger their forecasts. From that standpoint, valuation judgments come down to whether a given investor is optimistic or cautious on how the economy will progress throughout the year.