Needham Slashes Semiconductor Estimates On 'Muted' Second Half Recovery

In a report published Friday, Needham analyst Rajvindra Gill lowered his estimates across the Semiconductor space, noting that investors should "move to the sidelines" during the summer months. "Across the top 50 semiconductor companies, the median 2Q revenue decline was 1.5 percent Q/Q compared to the 10-year historical average of growth of 5.5 percent quarter over quarter," Gill wrote. "While most companies are set up for an easy compare coming into 3Q, and consensus estimates largely reflect a sizable snapback in 3Q and 4Q (5.8 percent and 3.7 percent respectively), we remain cautious on a snapback in the 2H15." However, Gill also noted he is "confident" M&A activity will continue, placing a floor on valuation for the group. In addition, the analyst is still "constructive" on the industry's long-term prospects as companies focus on margin expansion and returning capital investors.

Individual Company Commentary
Atmel: Likely Acquisition Candidate According to Gill, a potential acquirer could help boost Atmel Corporation ATML's gross margins to the mid-50 percent level and reduce its OPEX/sales to 25 percent, hence generating a 30 percent margin business. Gill also commented that the Street is expecting a recovery in the second half of 2015 following a below seasonal second quarter base. However, he is skeptical that the company can return to a normal second half seasonality given the "softening" industrial MCU market, "lumpiness" in the ASIC business and weak demand in China for handsets. Shares remain Buy rated with an unchanged $11 price target. Cypress Semiconductor: ‘More Gradual' Recovery Likely According to Gill, Cypress Semiconductor Corporation CY is expected to undergo a "more gradual" recovery in the bottom half of 2015 instead of a "quick snap back." As such, the analyst stated that the Street's consensus forecasts are "too aggressive." Looking forward, Gill noted that he still sees $1.30 of earnings per share power in fiscal 2017 due to operating and COGS synergies, thereby creating a "favorable" risk to reward profile, even in an environment where revenue is expected to be flat to negative 2.5 percent for each of the next three years. However, if the company were to achieve "moderate" 5 to 7 percent growth through 2017, upside estimates to its earnings per share could reach $1.65 as the company approaches its 50 percent gross margin target. Shares remain Strong Buy rated with an unchanged $20 price target. Freescale Semiconductor: Strong Advocates Of Merger Commenting on Freescale Semiconductor Ltd FSL, Gill stated that ongoing macroeconomic demand issues, expectations for continued weak wireless infrastructure spending, and a skepticism regarding a "snapback" in the bottom half of 2015 creates near-term headwinds. However, despite the near-term issues, the analyst remains a "strong advocate" of its merger with NXP Semiconductors NV NXPI as the combined entity could generate $9 to $10 of earnings power in 2017, even if it experiences "modest" revenue growth rates. Shares remain Strong Buy rated with an unchanged $52 price target. Microchip Technology: Fair Valuation At Current Levels According to Gill's estimates, Microchip Technology Inc. MCHP is expected to realize fiscal 2016 and 2017 growth levels that are in-line with the broad industry growth rates. Gill did note that he is "encouraged" by the company's recovery since last October's negative pre-announcement, but shares are "fairly valued' at a current 15.7x 2016 earnings per share estimate. Shares remain Hold rated with no assigned price target. NVIDIA: ‘Gradual' Recovery Off 2Q Base Gill is forecasting NVIDIA Corporation NVDA will report a 5.5 percent quarter over quarter revenue growth in the October quarter and 3.4 percent in the following quarter. The analyst noted that his third quarter estimates is "slightly" below the company's median five-year growth rate given expectations of a "more gradual" recovery in the PC market. At the same time, the fourth quarter estimates are above the five-year median due to the analyst's "comparatively lower 3Q base." Gill also stated that shares are trading at a discount (13.8x his fiscal 2016 non-GAAP earnings per share estimate) due to investors' fear of its royalty stream from Intel Corporation ending in March 2017. However, even zeroing out the revenue stream, the analyst still sees long-term earnings power in the $1.50 range in calendar year 2017. NXP Semiconductors: Street Estimates ‘Too Aggressive' The Street is currently forecasting NXP Semiconductors to experience 5.9 percent and 4.9 percent sequential growth in the third quarter and fourth quarter, respectively. According to Gill, these figures are "too aggressive" as he sees a "more gradual" recovery. However, the analyst remains a "strong advocate" of its merger with Freescale Semiconductor as the combined entity could generate $9 to $10 of earnings power in 2017, even if it experiences "modest" revenue growth rates. Shares remain Strong Buy rated with an unchanged $140 price target. ON Semiconductor: In-Line Results Now Expected ON Semiconductor Corp ON previously expressed optimism for an above seasonal bottom half of 2015 during its first quarter results. However, Gill doesn't share the same viewpoint is expecting the company's results to be "roughly" in-line with its historical seasonality. Looking forward, Gill sees a six percent growth for 2016 being "reasonable" given its numerous growth platforms including image sensor attach rates, increased content on Intel's Skylake platform and wireless charging exposure. Gill also suggested the stock should be viewed as a "premier automotive semiconductor play with a gross margin expansion story to boot." Shares remain Buy rated with an unchanged $17 price target. SanDisk: ‘Muted' Recovery Following a below seasonal second quarter, Gill is now expecting SanDisk Corporation SNDK to undergo a "muted" recovery in the bottom half of 2015 due to ongoing NAND pricing pressure, a lower gross margin profile and lower than expected enterprise SSD business. The analyst also stated that SanDisk's long-term product portfolio "continues to be misaligned" to the declining retail market and the company needs to adjust its enterprise strategy. As such, the company as at a "serious competitive disadvantage" to its peers that have both DRAM and NAND capabilities. Shares remain Hold rated with no assigned price target. Silicon Laboratories: Softening Consumer End Market Demand Finally, Gill is projecting a softening within the consumer end market (TV) which doesn't bode well for Silicon Laboratories NASDAQ: SLAB). Specifically, the analyst highlighted consensus estimates calling for a four to five percent quarter over quarter growth rate in the company's third quarter being "too high" given weakening consumer end demand and when compared to the company's five-year median third quarter growth rate of only 2.1 percent. On the other hand, Gill suggested Silicon Laboratories represents a "compelling" Internet of Things play given its portfolio of MCUs, sensors, and low-power connectivity offerings. However, shares trading at a peak P/E multiple of 20.0x 2016 estimated earnings per share is "well above" its peers. Shares remain Hold rated with no assigned price target.

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