Semtech: Fiber Optics and Copper (ACC) AI Networking Components

Posted on December 13, 2024June 30, 2026 by io-fund

Semtech is emerging as a data center networking component company that offers competitive solutions for the next leg up in AI systems. The company is going through a pivot due to a new approach for short haul networking that would rely on copper wiring and components instead of optical networking.

Over the past decade, Semtech became known for its long-range (LoRa) networking solutions, which are long range, lower power wireless platforms. Internet of Things (IoT) devices and satellites use Semtech’s low power wide area network and radio frequency transmitters for up to 10X the range and 3X less power.

Relying on this experience in providing connectivity modules, the company provides data center components for the high speed, and high bandwidth needs that AI data centers require. Nvidia is testing the upper limits of what AI servers can do, which means how these systems are built are in a constant state of flux. Semtech may have a unique opportunity to supply Nvidia with copper redrivers, DSP components, and linear pluggable optics. By the end of 2025, it’s expected that Meta and other cloud service providers will be building out Nvidia GB200 systems with Semtech’s copper networking components.

Brief Background on Data Center Networking & Components

Electro-optics help to increase data rates and has replaced NRZ data transmission due to doubling the bit rate. Hyperscalers require high bandwidth and port density. PAM4 connects networking ASICs with AI machines and servers. Digital-based PAM4 uses analog-to-digital converters to clean up the signal in the digital domain before converting it back to analog to transmit.

Data center interconnects have transitioned to 200-gig, 400-gig and 800-gig PAM-based electro-optics – which are 100GBx2, 100GBx4, and 100GBx8. Of these, the 800-gig is the primary interconnect for AI deployments. Artificial intelligence and machine learning drive demand for the 800-gig PAM to increase the speed of input-output and to process the data flows. This doubles the throughput (bandwidth) due to an 8x100Gpbs optical transceiver for inside and between AI clusters.

There is a 1.6T solution with 200-gig per lane that Marvell was first to launch for both the 5nm and 3nm. The 200-gig per lane carries outsized importance in the next leg up for PAM4-based networking. Marvell’s Ara 1.6T PAM4 DSPs on the 3nm process are designed for GenAI and the Nova 1.6T PAM4 DSPs on the 5nm process are for broader AI/ML applications. We discussed this here and most recently here.

1.6T PAM4 DSPs are retimer devices that allow for 200-gig per lane on both the frontend and backend to support the increased need for connectivity and higher bandwidth that AI infrastructure requires.

Marvell’s solutions are built for optical networking. You’ve likely heard the word “fiber,” such as Google’s Fiber internet service, which refers to fiber optic cables that transmit data as light pulses. Optic fiber networking are thin strands made of pure glass whereas the other option is copper cables. Optic has a commanding 70% market share in data centers due to significantly faster speeds than traditional copper wiring. Optic networking also allows higher bandwidth, preventing packet loss and jitter, which as you can imagine, can become a problem when training data-hungry AI models and deploying them.

Data centers have maintained a mix of optic networking and copper networking around that 70/30 split because optic networking is costly and harder to maintain. Optical components are also known for running hot and failing. Currently, the sought-after mix for AI systems is to use optical networking for long haul for large clusters of 1,000, 10,000 or 100,000 devices and to use copper for short haul.

Blackwell is Testing the Upper Limits of Power Wattage

Originally, the Blackwell B200s were designed to be 120 kilowatts of power. In order to achieve a lower power wattage of 100 kilowatts of power, Nvidia changed the interconnects from optic fiber to copper. According to the Next Platform, these systems will use up to 5,184 copper cables with up to 200GB per SerDes lane with NVLink switches. The article has a link to a picture of the copper cables, which helps to visualize what thousands of cables going into a NVL72 server looks like.

The new Blackwell systems are being designed with copper cables for the short haul of connecting up to 72 GPUs. Copper networking previously had a reach of 1.5 meters, yet this has evolved to where there is now a reach of 3 meters to assist in connecting these large systems. This leads to Semtech, which is reporting early, promising signs by offering copper networking components for the AI data center.

CopperEdge 200G Redrivers:

A notable area of difference is that optical networking requires retimers whereas copper networking relies on redrivers. The lower power requirements from the 120 kilowatts to the 100 kilowatts on Nvidia’s NVL rack scale systems partly comes from removing the retimer and the optical transceivers.

Passive copper cables can only enable reach of 1.5 meters, limiting the use of passive copper cables in data centers. The need for increased data rates has created strong demand for active copper cables (ACC) that help to extend reach for copper cables up to three meters. In Q3, Semtech initially shipped the CopperEdge 200-gig linear redrivers used in 1.6T Active Copper Cabling (ACC). The management stated there will be a “nominal ramp” next quarter and then “progressively” ramp from Q1 to Q4 of next calendar year (fiscal 2026).

According to management’s opening remarks: “At 200-gig and at a cable length up to three meters, CopperEdge will meet signal integrity requirements not readily achievable with direct attached copper, or DAC, cables. And at a lower latency, lower cost and much smaller power consumption required compared to DSP-based retime solutions.”

Semtech’s management team is essentially communicating that previous debates to where copper was not a suitable replacement for optical networking was relying on passive copper cables instead of active copper cables (ACC).

Last month, Meta presented a dual rack NVL36 system called Catalina using Semtech’s CopperEdge-enabled active copper cables (ACCs). According to management, “Semtech's low-power, low-latency CopperEdge solutions have gained positive attention in the data center ecosystem. And our technical collaboration with a number of CSPs and cable manufacturers has accelerated since last quarter.”

According to the Q&A, the qualifications with the additional CSPs are expected to contribute to revenue by mid-2025: “So, the applications on the board and in the cable and even in the connectors by the multiple CSPs are in the qualification phase, in the demonstration phase. So, the typically good thing about the copper-based solutions is the qualification cycle is relatively short compared to the optical-related products. So, I will say probably from the mid of 2025 calendar year, the other opportunities on the linear equalizer will start contributing to the revenue.”

Tri-Edge PAM4 and FiberEdge TIA, Laser Drivers:

Semtech shipped 400-gig active optic cable (AOC) PAM4 electro-optics this quarter, which includes SKUs for both long-reach and short-reach optical links. Management stated that in addition to CopperEdge, “our Tri-Edge PAM4 products continue to contribute meaningful sequential and year-over-year growth.”

FiberEdge transimpedance amplifier (TIA) and laser drivers enable high-speed, short reach interconnects with new SKUs announced a year ago. It was stated on the call that management believes they have captured incremental market share for these short reach TIA and laser components: “Data center deployment at 100-gig has been ramping up strongly and we believe we have captured incremental market shares, thanks to our closer engagement with our customers and our operations excellence.”

There is evidence that Semtech is a supplier for the TIA and laser drivers for the new Nvidia-based DSP that was announced recently. The initial reaction from analysts is that Nvidia’s DSPs could claim 10% to 20% of the market by 2026.

Semtech has a newer product within Linear Pluggable Optics (LPOs) showcased last March. According to the initial press release, these newer-gen LPOs help to deliver the high speed that AI and ML applications require while reducing power consumption by 50% versus DSP-based solutions. Note: You can read more about DSPs in our Marvell write-up here. here. According to the earnings call,

Semtech has received initial orders for test and qualification on its 800-gig and 1.6T LPO transceivers. As far as timing goes, it was stated: “Our confidence in LPO adoption has increased since last quarter with meaningful net sales contribution from TIAs and redrivers expected by the latter portion of FY '26.” LPOs can reduce the number of DSPs required, thus resulting in reduced power consumption.

$100M Opportunity for CopperEdge:

In the June earnings call, it was stated that the copper ACC opportunity was a $100 million market opportunity with Semtech seeing about 50-50 of this: “So, the number of cables that could be used is heavily dependent on both the rack configuration and NVL72 versus NVL36, and the number of horizontal connections, and obviously, the number of NVLs that we'll ship next year. So, it's heavy dependence on shipment configuration, but to just cut to the chase, we kind of size it at $100 million opportunity, not as base case, I definitely don't want to put a high side case number out there. I think on that base case, it's reasonable to expect that we're going to share production between us and one other component supplier. And if you want to just put a slug in there for the share that we would see, you could call it 50-50.”

CopperEdge had net sales this quarter that were “in the high-single-digit million dollars.” According to discussions on the call, Meta’s Catalina is going to be the main platform: “We know one major CSP is going to be used at the baseline for deployment in 2025 and beyond as long as they use GB200 GPU processors.” From there, it’s expected the capabilities will draw in more cloud service providers (CSPs) due to improved signal integrity and lower power consumption.

This quarter, for the CopperEdge 200GB redrivers, the CEO stated demand should be measured by the number of ports for the 200GB rather than the number of Nvidia NVL systems. Specifically, it was called out that Broadcom’s Tomahawk 6 will have ports for 200GB, which is likely to increase the opportunity beyond the $100 million (at 50-50 share) that was called out a few quarters back.

Here was an important exchange in the Q&A:

Craig Ellis:

Yeah. Hong, Mark, congrats on the execution, especially around growth and margins. Hong, I wanted to go back to data center a bit, maybe approach it in a more longer-term way. So, I think it was at least three quarters ago that we started talking about what seemed to be a single company, more single-product opportunity as having $100 million base opportunity to it that would be in the '25, '26 timeframe. The question is this, as the business looks like it's gotten significantly broader customer and application level exposure and design-in potential, how do we think about the size of this business two to three years down the road?

Hong Hou:

Craig, that's a great question. I think the opportunity started with as a single company, single platform and that is a great trailblazer for this new product that accelerated our time-to-market, but right now, as you mentioned, as we observed, this capability is broadly recognized and beyond that single company beyond that single platform. So, that's why we have been thinking about and to qualify the opportunity by counting the number of 200-gigabit per second ports.

The reason for that is everywhere you have 200-gigabit per second transport, you have the same challenge. You need the same solution for signal integrity. And with the Tomahawk 6 rolling out right around the corner, well, maybe six months to 12 months and all the ports is going to be 200-gig, and it's only increasing our opportunities. So, so far, the application has been for scale-up, but with the scale-out added into the opportunity pool, we got a tremendous opportunity in there.”

-End Quote

It was mentioned again that the $100 million baseline for the ACC opportunity is a floor — and not a ceiling: “We have invested time with our customer and end-users of the racks over the past few months. We reaffirmed our expectation of exceeding the floor case provided a couple of quarters ago based on the first-hand information from the ecosystem.”

Linear Pluggable Optics (LPOs) to Ramp in H2 2025:

As stated in the Product paragraph above, Linear Pluggable Optics (LPOs) will see “meaningful net sales contribution” by the “latter portion of FY26.” According to the Q&A, the NVL36 and NVL72 systems from Nvidia will drive this demand specifically for the front-end ports:

“And I have heard some others using NVL72 and — where we don't have the contribution for backplane, but at the front-end, they either need to connect 1.6T ports or 800-gigabit ports to top-of-the-rack or end-of-the row switches. I think that's where LPO can really have a good — provide a very differentiating solution because of the low power consumption. So, I think that is probably why the industry is pushing very hard on the LPO solutions.”

Semtech’s management also made it clear that they also have the best linear receive optics (LRO) and will benefit regardless of a current debate on if LPO is interchangeable with current ethernet switching chips: “To us, we have the arguably the best driver — best TIA on the receiving side. So, we'll benefit from either LPO or LRO. And whereas the industry progress in getting better understanding on the compatibility of different type of host with LPO and LRO capabilities, I do believe this type of transceivers can chip away a sizable total addressable market currently served by the DSP retimed solutions.”

According to the opening remarks, Semtech believes they have an advantage with LPOs and the issues the market has seen from other suppliers: “CSP [cloud service provider] engagement has proven insightful. It appears that LPO adoptability is meaningfully correlated with a 30 signal-to-noise ratio at the host. Fortunately, both current and future generation switches supply significantly improve the performance, and this enables easier LPO adoption in many specific use cases.”

About a year ago, there were reports that Nvidia had plans of using LPOs by the end of 2023. You can read Semtech’s LPO announcement here.

Revenue:

Semtech’s revenue returned to positive growth after two quarters of negative revenue growth. This was helped by record AI data center revenue which increased 78% YoY and 58% QoQ. The infrastructure end market is expected to provide the strongest near-term tailwinds.

Q3 revenue grew by 17.9% YoY and up 10% sequentially to $236.8 million. Data center revenue was the main highlight of the report, increasing by 78% YoY and 58% QoQ to a record $43.1 million.
Management has forecast a strong Q4 guide of $250 million, representing 29.6% YoY growth at the midpoint. The Q4 guide beat estimates by 3.3%. Per the call, this will be primarily driven by data center infrastructure revenue: “We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. Infrastructure is expected to provide the strongest near-term tailwind.”
Analysts expect growth to sustain with Q1 revenue of 23.9% YoY to $255.27 million and 25.3% YoY to $269.9 million in FQ2.
Looking further out, analysts expect FY2026 revenue to grow 22.3% YoY to $1.11 billion and 16.1% YoY to $1.29 billion in FY2027.

End Markets

Infrastructure:

Q3 Infrastructure End Market revenue grew by 52% YoY and 24% QoQ to $65.8 million. This segment accelerated from last quarter with 25% YoY growth and down (-5%) QoQ. The large sequential rebound was primarily led by record data center revenue of $43.1 million, up 58% QoQ and 78% YoY.

The company began shipments of the CopperEdge 200-gig linear redrivers that are used in 1.6T Active Copper Cable (ACC) applications. CopperEdge sales in FQ3 were high-single-digit million dollars, and management expects a higher contribution in Q4, followed by a ramp into FY2026. As stated, Meta is generally understood to be the lead customer with the Catalina system, yet additional CSPs (cloud service providers) are in the qualification stage with expectations there will be more customers by H2 CY2025.

While proving the outlook for Q4, CFO Mark Lin said, “We expect net sales from the infrastructure end market to increase sequentially with data center applications leading to growth. Infrastructure is expected to provide the strongest near-term tailwind.” It was later stated to an analyst: “Harsh, we said this in Q3, it was high-single-digit millions in Q3. It's a nominal ramp in Q4, and then it progressively ramps through FY '26, Q1, Q3 — Q1, Q2, Q3 and Q4. So, we've been pretty consistent with that messaging and we don't really see a change in that timing.”

Our firm will be looking to Q1 onward for Semtech to show an important acceleration in their leading segment, Infrastructure.

High-End Consumer:

High-end consumer revenue grew by 7% YoY and 8% QoQ to $40 million, helped by market share gains and seasonally strong Q3. Revenue decelerated slightly from 9% YoY and 7% QoQ growth in Q2. Due to seasonality, management expects high-end consumer revenue to decrease sequentially in Q4.

Revenue in high-end consumer TVS (Transient Voltage Suppressor) grew by 9% QoQ and 7% YoY to $28.3 million and management highlighted that Consumer TVS revenue reported sequential growth in each quarter in FY2025.

In the earnings call, the CEO said “We communicated market share growth in consumer TVS grew last quarter, augmenting our prior commentary. Our expectation is for continued market share expansion as the world's largest consumer electronics company and at other key North American and Korean companies. Based not only on our design-in activities for future generations of product, but also for Semtech's ability to deliver on time and to meet demand upside.”

Industrial:

The industrial end market grew by 9% YoY and 5% QoQ to $131 million. With the increase in LoRa and the cellular IoT portfolio, the industrial end-market revenue is expected to increase sequentially in Q4.

LoRa-enabled solutions grew by 1% QoQ and 104% YoY to $29 million. The CEO highlighted, “Encouragingly, consumption for our recent generation LoRa product has been increasing, which signals market adoption of this enhanced capability.
LoRa Gen 2 offers a smaller footprint and reduce the power consumption, while LoRa Gen 3 delivered improved radio performance and a further simplification of customer development through onboard LoRaWAN provisioning capability. Supporting LoRaWAN remains a key company strategy.”
IoT systems revenue grew by 11% sequentially to $57.9 million with solid bookings and backlog.
IoT Connected Services revenue was $24.6 million, benefiting from our AirVantage connectivity platform.
Industrial TVS revenue was $10.2 million, up 7% QoQ. The CEO noted, “We have noticed the current market sentiment in the industrial market, but we remain confident in Semtech growth with our product offerings.”

The Sierra Wireless acquisition has negatively impacted the industrial end market revenues. The company had acquired Sierra Wireless in January 2023. However, the company experienced reduced business levels in the business acquired from Sierra Wireless due to the challenging macro environment and high-interest rate environment. This could be the portion of the business that will be divested (see below).

Margins Expanding:

The company has undertaken organizational restructuring and reduced workforce to reduce overhead spending. The company’s margins have improved, helped by operating leverage and a higher-margin product mix like CopperEdge. The incremental margin gain from the product mix was also further answered during the Q&A.

Tore Svanberg (Analyst)

“Yeah, thanks. I just had a quick follow-up for Mark. Mark, so 40 bps — basis point improve gross margin for January. How should we think about gross margin for fiscal year '26? Is it mainly mix at this point that will drive the gross margin, or is there — are there other things maybe scale or anything like that that could potentially also lift it as well?

Mark Lin (CFO)

Yeah. Scale definitely helps, but definitely, it's the primary driver in our guide is mix, right? So, it's a 40-bp improvement, but we did get a little bit of a tailwind from the CopperEdge shipments this quarter, right? So that was definitely a tailwind. But as other portions of our business inflect upward, there's a little bit lower margin in IoT, our systems hardware business, so that's a little bit lower. We'll definitely take the gross profit, right, but definitely that business doesn't contribute quite the percentages, let's say, our infrastructure business.”

Q3 gross margin was 51.1% compared to 46.3% in the same period last year.
Adjusted gross margin improved 110 bps YoY and 200 bps QoQ to 52.4%. Management has guided for a sequential improvement of 40 bps to 52.8% in Q4, helped by a better product mix.
Q3 adjusted operating margin improved to 18.3% from 10.2% in the same period last year helped by operating leverage and better product mix. Management has guided for 140 bps QoQ improvement to 19.7% in Q4.
It is also important to note that last year, the company reported non-cash goodwill and intangible impairment charges of $513.4 million in Q4 due to the lower contribution than expected from the acquired Sierra Wireless business. The company may also record the impairment charges in Q4 this year that impact the GAAP operating margins.

Q3 net loss was (-$7.6 million) or (-3.2%) of revenue compared to (-$38.3 million) or (-19%) of revenue in the same period last year. Adjusted net income was $20.3 million or 8.6% of revenue compared to $1.5 million or 0.7% of revenue in the same period last year. Management Q4 adjusted net margin guide is 10.3%.
Adjusted EBITDA was $51.1 million or 21.6% of revenue compared to $28.1 million or 14% of revenue in the same period last year. Management Q4 adjusted EBITDA margin guide is 22.8%.

EPS Growth in Triple Digits

The company beat Q3 adjusted EPS estimates by 11.7%, which was helped by operating leverage and a better product mix. Q3 adjusted EPS grew more than 100% sequentially to $0.26. Management Q4 adjusted EPS guide is $0.32, representing sequential growth of 23.1% and beat adjusted EPS consensus by an impressive 18.5%.

Adjusted EPS is expected to have strong growth in the coming quarters.

Analysts expect Q1 FY2026 adjusted EPS to grow 445% YoY to $0.33 and FQ2 adjusted EPS to grow 252.7% YoY to $0.39.
Looking further out, analysts expect FY2026 adjusted EPS to grow 120.5% YoY to $1.69 and 33.7% YoY to $2.26 in FY2027.

Cash Flow Inflected

The cash flows have been lumpy in the past. The company reported strong cash flows in the recent Q3 helped by improving bottom line and is expected to continue to generate positive cash flows in the coming quarters.

The CFO replied to an analyst question on free cash flow generation in the next few quarters, suggesting that the company will generate positive cash flows despite the inventory buildup to support the data center growth. “Yeah. Just, I’m quite pleased, Tristan, Q3 operating cash flow was $29.6 million. Free cash flow was $29.1 million. So, cash flow definitely we’ve inflected consistent with the business. And I’m pleased that cash flow is really – generation is broad-based across our businesses. We may have to build a little bit more inventory supporting demand, but we continue to generate cash.”

Q3 operating cash flow was $29.6 million or 12.5% of revenue compared to (-$5.8 million) or (-2.9%) of revenue in the same period last year.
Free cash flow was $29.1 million or 12.3% of revenue compared to (-$12.4 million) or (-6.2%) of revenue in the same period last year.
The company had cash of $136.5 million and debt of $1.19 billion at the end of Q3 FY2025. The company made a principal repayment of $5 million of the credit facility in FQ3 and a further repayment of $10 million subsequent to the end of the quarter.
The company accumulated the high debt of about 9X its cash due to the Sierra Wireless acquisition in January 2023. Management is working on reducing its high debt.
The company also recently announced the closing of the public offering for a total gross proceeds of about $661 million and it plans to use the proceeds to repay debt. With the proceeds from the recent offering, it will help to reduce the debt to about 2X its cash. However, it will also lead to dilution of about 12% to the existing shareholders.

Potential Divesture of Non-Core Segments

Out the gate, the CEO stated the primary goal is for portfolio rationalization and balance sheet improvement. He stated: “I'm fully aware of the financial and the non-financial benefits of portfolio rationalization, and we are particularly focused on opportunities that accelerate our debt repayment and decrease our leverage ratio.”

When asked during the Q&A if Semtech is still interested in selling parts of the business, the CFO affirmed this is a top priority: “At this point, I think all of our businesses have inflected the growth. So, as Hong mentioned in his prepared remarks, we believe that should help valuation, but that in no way will delay or maybe impede our desire to potentially divest these non-core businesses.”

We view any potential divesture of non-infrastructure segments as bullish as removing those segments to allow for a more concentrated AI-stock valuation. The more that Semtech can become an AI pureplay, I think the better it’ll be for its stock performance. Psychologically, it will help investors to see more clearly the material progress in the important pivot underway.

The company’s Sierra Wireless acquisition in January 2023 did not meet the company’s expectations. The company experienced reduced growth levels in the business acquired from Sierra Wireless due to the challenging macro environment, and the high interest rates environment increased the interest expenses. So, in our view, the company might divest this business.

The company appointed Dr. Hong Q. Hou as the President and CEO in June 2024. He has been a member of the Board of Directors since July 2023. He replaced the previous CEO, Paul H. Pickle, due to his differences with the board. Dr. Hou has previously held senior leadership positions in Intel and Fabrinet.

China Exposure:

There is exposure to China in the PON product, which stands for passive optical network and is used for telecom use cases. It’s helpful this is not AI-related, per the information from the call. Per the earnings call: “So, the PON business up to this point has been primarily in China and we expect another tender offer over the next quarter or two.”

Conclusion:

As stated in the Q4 webinar, 2025 belongs to Nvidia (again), yet we plan to expand how we participate in a more unique, strategic way by looking more deeply at suppliers-of-choice in what is decidedly AI hardware’s moment to shine. Semtech’s suite of products within signal integrity are off to a great start with a noticeable rebound this past quarter, yet the opportunity is in front of this key Blackwell supplier, and the lull in Q4 should allow a reasonable entry.

The current beat was driven by the fiber products, while the ACC (copper) products are slated to meaningfully contribute come Q1. By carefully threading a needle from what’s been stated on the earnings calls and what’s been announced around the Blackwell GB200 systems, ACC could be a 5X opportunity with Meta alone — with more CSPs likely to follow suit by this time next year.

A note of caution is that Semtech has a high debt leverage ratio. The company is working on bringing the debt leverage down. Although managemet was not clear on timing, I’d like to see Semtech being more of an AI pureplay by the time we exit next year. The portfolio adjustments will help it stand out for its growth potential in the oversubscribed space of AI infrastructure.

Advanced Members should keep an eye out for trade alerts as we closely track this little-known company.

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Marvell Technology, Inc. Update: Q4 FY2022

Posted on March 25, 2022June 30, 2026 by io-fund

Marvell reported strong Q4 results and is on the precipice of ramping demand from 5G and cloud infrastructure spending heading into FY2023. We have discussed throughout our coverage of Marvell and Inphi that the combined company is well positioned to benefit from these two trends.

Beth had outlined that “the growth opportunity for Marvell (and the reason I am investing) is for the lead Marvell currently has in 5G”, adding that datacenter will also be a strong tailwind for the company. With 5G ramping and datacenter growth expected to surge in the upcoming quarter, Marvell is well-positioned to benefit from these two secular trends. Importantly, Marvell has the inventory on hand to meet the rising demand, a trend that deserves a premium in today’s supply-constrained economy.

We expect that our thesis around 5G and datacenter growth will be realized in the first half of 2022, leading to outsized growth. Marvell’s financials have also been improving and the company will likely resume share repurchases later this year. While the outlook for Marvell is strong, we will be monitoring the back half of the year for a potential slowdown in growth as the 5G ramp peaks. However, this should be offset by strong demand from datacenters and edge computing tailwinds. I discuss Marvell’s latest results and drivers of demand in more detail below.

Marvell: Q4 Earnings Review and Outlook

In the latest quarter, sales increased 68% YoY to $1.3 billion, an acceleration from the 61% YoY growth rate in Q3 and beating estimates by 1%. During the year, Marvell merged with Inphi in a $10 billion transaction in Q1, and then also purchased Innovium for $1 billion in October. The recent M&A activity has skewed results, but on a Pro-forma basis, 2021 sales growth accelerated to 26% YoY, up from the prior year Pro-forma growth rate of 22%.

Sales were driven by strong growth in Datacenter and Carrier infrastructure (5G). Datacenter growth increased 113% YoY (15% QoQ) to $574 million or 43% of Q4 sales. On the Q4 call management explained that “the majority of the growth was from cloud, driven by robust demand from hyperscale customers.”

Carrier infrastructure increased 45% YoY to $241 million (18% of sales), and also accelerated on a sequential basis, growing 12% QoQ, up from 9% QoQ in the prior quarter. The strong growth was driven by Marvell’s 5G business, which grew sequentially by over 30% and exceeded management’s initial guide. On the call, management explained that it benefitted from the broader roll out of 5G technologies, and expects growth to continue into Q1 FY2023. I outline expectations for 5G spending in more detail below.

A rising trend for Marvell is its Enterprise Networking, which grew sales 64% YoY to $263 million. Management explained on the Q4 call that this end market was “going through an inflection” as hybrid work environments are driving demand for an “extended period of refreshing [enterprise] infrastructure”. This includes increasing bandwidth and improving security. To be complete, automotive increased 134% YoY to $79 million and Consumer increased 11% YoY to $185 million.

Gross margin declined YoY from 53% to 50%, which was driven by a step-up valuation in inventory and other non-cash charges following the M&A activity during the year. Non-GAAP gross margin increased 160 bps YoY to 65%, which is high relative to peers. Following the rise in non-cash expenses, operating margin fell YoY from 5% to 3% while non-GAAP operating margin expanded 860 bps YoY to 36%. GAAP earnings were $0.01/share, which missed estimates by a penny while non-GAAP EPS of $0.50 beat estimates by $0.02 and grew 72% YoY.

Cashflows from operations were $346 million and net leverage was reduced to 2.3x. Management explained on the call that they are on track to reach their targeted leverage ratio of 2x by the end of Q2, at which time they expect to restart share repurchases. This is a favorable trend and could support a higher share price, all else equal. Prior to the Inphi merger, nearly 100% of free cash flow was directed towards share buybacks. Utilizing Management’s long-term guide for 32% FCF margins, Marvell has capacity to lower its share count by about 4% per year, which will accelerate EPS growth.

Looking forward, sales are expected to accelerate and grow 71% YoY (6% QoQ) to $1.425 billion. Datacenter sales are expected to grow over 100% YoY in Q1 and in the mid single digits on a sequential basis, while Carrier infrastructure sales are expected to grow over 40% YoY and in the low-single digits on a QoQ basis. Enterprise networking sales are expected to accelerate and grow in the mid-teens on a QoQ basis while Automotive is also expected to remain strong and grow QoQ in the high-single digits. Finally, Consumer is expected to be flat QoQ. Non-GAAP EPS growth is expected to accelerate and rise 76% YoY to $0.51. I discuss the core drivers of Marvell’s demand in more detail next.

Update on 5G infrastructure

As outlined in our initial analysis, Marvell has a leading position as a 5G supplier and supplies the components for 5G base stations to customers such as Nokia and Samsung. We expected that Marvell would take a commanding lead in 5G infrastructure in 2021, a trend that we can see has finally arrived, as Marvell’s 5G sales increased 30% QoQ in the latest quarter.

Marvell’s 5G customers include Nokia and Samsung, which partner with carriers such as T-mobile, Verizon and AT&T to build out their 5G infrastructure. As a result, looking at capex plans from these telecoms can provide insight into the expected ramp in 5G spending going forward. As I’ll highlight below, the big three American carriers expect to ramp spending on 5G deployments by about $10 billion in 2022, which will drive demand for Marvell’s products.

Verizon explained on their Q4 call that they expect incremental capex related to the 5G upgrade cycle to peak this year and then start to normalize. Specifically, Verizon CFO Matt Ellis explained that Verizon had guided for “incremental [5G CapEx of] $10 billion over five years. We're going to see the biggest part of that come through this year”. In the chart below, Verizon highlights that its C-Band overlay spending will ramp in 2022. C-band is the wavelength that Verizon is using in its 5G deployments. Importantly, the accelerated $10 billion in 5G spending is expected to conclude in 2023, so the 5G ramp will be a quick, but significant trend for Marvell.

Verizon Outlook for Capital Expenditures

Source

AT&T also guided that its capital expenditures are expected to ramp in 2022 and 2023. AT&T’s CEO stated during the company’s 2022 investor (03/11/2022) day that “it's a race to the home and to deploy 5G across the country. Our capital investment will be elevated over the next few years as we aggressively build a next-generation network with fiber and 5G”. AT&T’s guide for CapEx is expected to rise to $5 billion in both 2022 and 2023, driven by 5G deployments (shown below).

AT&T Outlook for Capital Expenditures Capex guide

Source

Finally, T-mobile recently increased its capex guide for 2022 to maintain the company’s position in 5G. T-Mobile’s capex has grown from $6 billion in 2019 to over $12 billion in 2021. Looking forward, T-mobile expects its capex to continue to rise to another $2 billion and reach around $14 billion in 2022 as it pulls forward 5G spending.

In aggregate, Verizon, AT&T and T-mobile are guiding for a ~$10 billion (~16%) rise in capital expenditures in 2022, mostly driven by the deployment of 5G infrastructure. Nokia, which is a significant customer of Marvell’s, explained during its Q4 earnings call that spending plans from American telecoms is a favorable trend. Specifically, management stated that “listening to the CapEx plans of the key [telecom] customers in America that is of course a reason for optimization”.

We expect that 2022 will be a peak year for 5G spending, directly benefitting Marvell. However, trends in datacenter are long-term secular trends that should sustain topline growth beyond 2022. I discuss this in more detail next.

Update on datacenter

With 5G ramping and likely peaking this year, Marvell will also be benefitting from another trend that is just now beginning to ramp: COLORZ II. We had outlined COLORZ in our Inphi analysis, explaining that “Inphi’s COLORZ silicon photonics technology allows data centers in the same metropolitan region to function like a mega data center. This facilitates faster edge computing within an 80/120 km distance for 30-megawatt data centers as they will be linked together and function like a 120-megawatt data center … When the COLORZ ZR 400G launches, it has the ability to become a critical supplier for data center interconnects and the converged edge of telecom and cloud connections.”

The time has arrived for the ramp in COLORZ 400G ZR. Management explained on the Q4 call that it expects datacenter revenue (its largest segment) to increase more than 100% YoY driven by the “strong ramp” in its 400-gig ZR datacenter interconnect products, which is termed COLORZ II.

CEO Matt Murphy added that the first iteration of COLORZ peaked at a $100 million run rate, which was driven primarily by one customer (Microsoft). In the upcoming iteration of COLORZ II, revenues will surpass the prior peak of $100 million in Q1 and will continue to grow from there. This is because the 400ZR is being adopted by multiple hyperscale customers, so revenues will be more substantial.

To get a sense of the cadence of topline growth we can expect from COLORZ II, we can use Inphi’s prior financials to provide a guide. COLORZ first shipped in volume in 2017 and Inphi recorded $59 million in sales from COLORZ in 2017, which then grew into $89 million in sales by 2020 and eventually peaked at a $100 million run rate, or nearly doubling overtime. CEO Murphy is saying that COLORZ II will start at the $100 million run rate and continue to grow thereafter. Considering COLORZ II has multiple customers, the ramp should be even more robust than the first iteration and COLORZ II sales could more than double overtime.

Since Marvell is directly tied to datacenter infrastructure spending, a decent proxy for demand is trends in CapEx from leading cloud providers such amazon AWS, Google Cloud and Microsoft Azure. As shown below, AWS, Azure and Google Cloud have ramped spending, and this spending is expected to continue to grow.

Specifically, Amazon stated during its Q4 call that “Just under 40% of that CapEx is going into infrastructure, most of it’s feeding AWS … If I look to the future, we’re still working through some of our plans 2022, but it’s coming into focus a bit. We see the CapEx for infrastructure [AWS] going up. We still have a very fast-growing business thats growing globally, and we’re adding regions and capacity to handle usage that still exceeds revenue growth in that business”

Google stated during its Q4 call that “In 2022, we expect a meaningful increase in CapEx.” And Microsoft added that it expects capex will be up YoY in the upcoming quarter. The increased capital expenditures from cloud providers is a favorable trend that will benefit Marvell’s topline going forward.

Marvell has the inventory to meet demand but there are risks

Given the expected ramp in Datacenter and Carrier infrastructure sales, which collectively accounted for over 60% of Q4 sales, it is important that Marvell has the necessary inventory to supply this demand. Marvell’s inventory levels have increased sharply recently, and rose 169% YoY to $720 million, outpacing the 68% YoY rise in quarterly sales. Moreover, since Marvell has the inventory on hand, it backs up management’s statements that they expect a significant ramp in revenue in the near term.

However, having excess inventory is typically an unfavorable trend, since the technology can quickly become obsolete which leads to lower prices, impacting earnings. This concern is somewhat offset by the scenario outlined above about ramping demand from both 5G and datacenters, suggesting that the build-up of inventory is appropriate. Furthermore, Marvell’s inventory composition is relatively healthy and is not loaded with idle finished goods inventory, which is at a higher risk of being written off. As shown below, finished goods were just 20% of total inventory, well below the five-year average of 31%.

A key risk that should be noted is the way Marvell sells its inventory. Marvell does not have agreements in place that guarantee sale to its customers. Marvell explained in its 10K that it must maintain large inventory balances because the “semiconductor industry is characterized by short lead time orders and quick delivery schedules”. If demand for its products declines, Marvell will be left with a very large inventory balance that will likely need to be discounted to turnover.

Another risk is that Marvell has now had to enter into manufacturing supply capacity reservation agreements with foundries to secure supply. This means that Marvell now has to prepay for inventory (unfavorable) and also must pay a fee to cancel its reserved capacity. Marvell has $2 billion of supply commitments signed through 2032 and prepaying for future supply increases Marvell’s risk of taking on too much inventory, which could pressure margins in the future. This is a relatively new development and is a direct result of the current supply chain shortage. However, this is broader trend in the semiconductor industry and is not isolated to just Marvell. Furthermore, securing supply in a tight market should be awarded a premium.

The key takeaway is that elevated inventory can be a concerning trend, but we think it is actually a favorable trend given the expectations for surging demand in the near term and supply-constrained environment. Furthermore, inventory composition is healthy with low levels of idle finished goods. We should expect to see Marvell’s inventory balance normalize going forward as the 5G and COLOR II ramp get underway.

Trends on the horizon: DPUs and customization

With datacenter and 5G taking center stage in 2022, there is a new trend gaining momentum that promises to be a significant driver of growth going forward that should offset the eventual decline in 5G spending. The rising trend is ‘customization’, which is being driven by hyperscale customers that are increasingly developing their own custom, optimized silicon for the cloud environment.

Marvell’s recent acquisition of Innovium was driven to improve the company’s reach in the cloud-optimized market. Innovium developed a leading cloud-optimized switching technology that is used in cloud data centers. Innovium is expected to report $150 million in sales in FY2023 after being selected as a supplier for a Tier 1 cloud customer. Marvell also disclosed that it has a strong pipeline of cloud-optimized silicon, with $400 million of contract wins in the pipeline that will turn into revenue in FY2024 which is expected to double to $800 million by FY2025.

Since the cloud environment is inherently different than the legacy on-prem environment, prior architectures developed long before the cloud was around are outdated and are not optimized for the cloud. It makes sense that new silicon solutions will be optimized specifically for the cloud, and Marvell is positioning itself to benefit from this rising trend.

For instance, Marvell disclosed in its 10K that it is transitioning its product offering “from standard server processors to the broad server market to focus only on customized server processors for a few targeted customers”, adding that “the demand for optimized solutions has been increasing as our customers seek greater customization and differentiation for their products and services”.

Customized silicon for the cloud will be a material contributor to Marvell’s topline in a few years, and will help offset the expected decline in 5G spending after the ramp in 2022. During the year, Marvell won “over a dozen cloud optimized programs across multiple Tier 1 cloud customers. A significant number of these designs are for custom DPU implementations, reflecting the increase in the attach rate of DPUs inside cloud data centers”. We had mentioned that DPUs would be a tailwind for Marvell, stating that Marvell will be a major player here and this trend will be a future bull thesis for Marvell.

Marvell is well-positioned to benefit from the rise in edge computing driven by 5G and datacenter growth, and new trends such as custom, cloud-optimized silicon. We expect to hold onto Marvell through the concurrent ramp in 5G and datacenter spending but will monitor the company closely heading into H2 2022 for a possible lull in growth as spending peaks. however, we expect datacenter, edge computing and AI tailwinds to drive topline growth for the foreseeable future.

Valuation and conclusion

Marvell trades at a 10x forward P/S multiple, down from its peak multiple of 17x in December 2021, but a premium to peers such as Broadcom (8x), AMD (7x), Qualcomm (4x) and Cisco (4x). Marvell also trades at a 30x forward PE multiple, down from its peak of 57x in December 2021 but also above the peer median of 17x. Importantly, Marvell’s Q4 earnings grew 72% YoY and are expected to accelerate to 76% YoY growth in the upcoming quarter. The company’s long-term guide for 40% operating margins going forward, coupled with its LT guide for ~25% topline growth, highlights that earnings growth will be significant going forward, a trend that supports a premium PE multiple. While Marvell trades at a premium relative to semiconductor peers, the company is well-positioned to benefit from strong secular tailwinds such as 5G, datacenter, AI and customized silicon, which warrants a premium multiple.

We believe that the upcoming year will be a breakout year for Marvell’s top and bottom-line as both 5G and COLORZ II are ramping this year. Marvell also has the inventory on hand to meet this demand and is positioning itself to benefit from new trends such as customized silicon. While we believe that Marvell will be strong, we will be monitoring growth expectations closely heading into H2 2022 as sales growth may slow as 5G spending peaks. however, we expect this to be a temporary trend that will be offset from the secular tailwinds from datacenter and edge computing infrastructure spending.

Additional Reading:

Disclosure: Bradley Cipriano and the I/O Fund own shares in Marvell and have no plans to change their respective positions within the next 72 hours. You can access the I/O Fund’s positions here. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies.Disclosure: Bradley Cipriano and the I/O Fund own shares in Marvell and have no plans to change their respective positions within the next 72 hours. You can access the I/O Fund’s positions herehere. The above article expresses the opinions of the author, and the author did not receive compensation from any of the discussed companies.

Qualcomm, Atomera, Nvidia, Lam & Chip Shortage

Posted on March 1, 2021June 30, 2026 by io-fund

Over the past few weeks, I have read many lagging explanations on the chip shortage – too many fabless semiconductor companies, too few foundries, automobile manufacturers paused ordering in March and didn’t prepare for the sharp rebound, tensions with China, and even a fire at the Asahi Kasei plant that specifically manufactures sensing devices for the automobile industry.

While all of these are true, the overarching issue is that the role of semiconductors has changed from a commodity to the primary accelerant of future technologies. This is because connectivity, automation, and ultimately AI, will disrupt every corner of every industry.

We saw this happen with data and cloud but now we must accelerate this to the next level for AI/ML and the common denominator is semiconductors. Automotive is only the beginning. We can add renewables to the list and even e-commerce as AR/VR and AI/ML attempt to prop up the leaders who are competitive enough to add these features first.

As a tech stock analyst, I don’t have the luxury of lagging analysis of any kind. My subscribers require (and deserve) forward-looking, and with my intense focus on semiconductor chips, I don’t think my readers are surprised that semis are under pressure due to an increasingly important role.

I have repeated (perhaps too many times) that there is no way forward without the semis. We are seeing this manifest in automotive right now, but as investors, we should get used to hearing about semiconductor shortages.

You and I can debate Palantir, Snowflake or C3.AI, for example, and the valuations or the right angle for AI-driven software, but the common denominator to these companies is the need for semiconductors to drive forward AI and 5G.

Now, we add the enormous push for auto manufacturers to compete with Tesla, Apple, Lucid Motors and what we have is a bottle neck where the automotive industry filters into semiconductors.

My guess is the demand won’t be letting up for many years as we are no longer in the cyclical pattern that semis are notorious for. Instead, demand will outpace supply for years to come.

Is this a bad thing or a good thing for our stocks? As investors, we can either listen to the news or listen to management. In this case, they are not aligned. Machines trade off news and natural language processing (NLP) but as human investors, we have the advantage of looking deeper into the issues.

I have written volumes of analysis leading up to the triple-digit growth we are seeing now in the data center from AI accelerator chips. Most of this was written when data center growth was negative. For instance, my Nvidia thesis was set end of 2018 — and in 2019 Nvidia reported negative data center revenue year-over-year for four quarters in a row.

I mention this because following a trend’s trajectory is more important than immediate gratification from the market. The trend will always win out over time.

I have maintained that chips will eventually lead the AI market and are the best angle for investing in edge computing. I have also defended our stocks against custom silicon. Now we have the first of what I predict will be many semiconductor shortages and bullish to me.

The shortage is that there are hundreds (thousands really) of companies that rely on semiconductors. This will come to a head with AI and 5G as those who go-to-market soon with these features will have an enormous competitive advantage.

Below, we will first look into the supply shortage as it pertains to the automotive industry. We will then discuss earnings and management statements from Qualcomm, Atomera, Nvidia and Lam Research.

Our goal is to see 60% or higher returns in these names. We have chosen semis as our foundational hedge and you can consider cloud software along with semis on risk/reward ratio. We understand the market has conditioned some investors to see very large gains in a short period of time. This is a mirage produced from quantitative easing, and now more than ever, we want quality companies that have a solid bottom line in our portfolio to protect us long-term. This also allows us to take moonshots with SPACs and other high-growth names comfortably.

Regarding the supply shortage, the last thing we are interested in doing is disrupting our long-term thesis for a short-sighted bump in the road. I explain why I think this is short-sighted and why we continue to be long NVDA, AMD, QCOM and LCRX. We are also long MRVL although earnings will occur after this blog is released.

Reference:

5G PDF
Qualcomm Blog
Atomera PDF
Atomera Update
Nvidia PDF
Nvidia Update July 2020
Lam Research PDF
Please search by stock ticker here for any additional research including Knox’s trade setups.

Background on Automotive Semiconductors

We’ve discussed the AI semi market growing at about 45% CAGR over the next few years. The 5G chip market has an even higher CAGR of 63%. However, automotive is forecast for a smaller growth rate of 10.7% CAGR.

Therefore, anything automotive-specific is not central to our thesis. However, semiconductor components in the automotive sector will add an additional 600 USD for each vehicle by 2022, according to Deloitte. This is a nice boon for Nvidia and Qualcomm. Xilinx also has exposure to the automotive segment. (These are the stocks we cover although there are others of interest in the semiconductor category).

ADAS leads the growth over a five-year period with semiconductor content that will add USD 100 for partial automation and up to 400 USD for a higher level of automation. Full automation will add USD 550.

Today, automotive semiconductors are primarily driven by microcontrollers (MCUs), sensors and memory. Over the next decade, electric vehicles, automation, digital connectivity and security will drive greater demand from this sector.

ADAS (advanced-driver assisted systems) are forecast to grow by 23.1% between 2017-2022 which drives demand for integrated circuits and MCUs. EV/HEV (electric vehicles and hybrid) are forecast to grow by 21% between 2017-2022 and Infotainment by 8.2%.

Source: Deloitte

Automation requires about 30 sensors for the most advanced autonomous driving at Level 5. The industry is developing more advanced microcontrollers and MPUs to handle and process the sensor data so the vehicles think/act like humans. For EVs, sensors and controls are required to run the engine efficiently.

The primary suppliers for automotive semiconductors include: Nvidia, NXP/Freescale, Renesas, Panasonic, Toshiba, Infineon, STMicro, Texas Instruments, Broadcom/Avago, AMD/Xilinx and Samsung. Intel/Mobileye is also a leader in automotive and automation.

Automotive chips are not as constrained by size although some are expanding their system-on-chip (SoC) platforms to the 7nm and 5nm size. However, the failure rate must be lower for automotive than mobile with a target of 0 failure rate compared to a target of less than 10% failure rate on mobile. Automotive chips must also tolerate high voltages and operate at a wider range of temperatures.

The specifications for integrated circuits and MCUs/MPUs are more stringent with expectations the chips will last 20 to 30 years compared to only four years for mobile.

Semiconductor foundries are required to achieve higher quality and yield; yet long-term reliability, or “latent reliability,” can be hard to achieve as components must perform on the road under normal wear and tear including electromagnetic interference, which can be hard to simulate.

Basically, automotive requires more R&D at the foundry level.

On a side note, we had initiated in Luminar and ultimately closed the position. LiDAR will continue to test investors as there are many new entrants and the technology is very expensive with dynamic range still unsolved for and requiring backup cameras/sensors. The cost of LiDAR has caused some companies, such as Mobileye, to start LiDAR development in-house to lower this cost once higher volume production begins. My best guess is Apple will do the same in future years.

Whether tech will own the AV/EV space or if traditional automakers will transition to own the space is still up for debate. My guess is that tech will lead again as autos are headed towards having operating systems in the vehicle. Autonomous driving is also an incredibly hard problem to solve and has nothing in common with the traditional mechanics of combustion engines.

Chip Shortage Update:

Automotive accounts for 10% of the semiconductor industry.

According to Alix Partners, the chip shortage may cut $60.6 billion in revenue from the global automotive industry this year across the whole supply chain.

One reason that automotive is being hit harder than cloud, for example, is because automakers halted orders on car parts between March and May of last year including chips as showrooms were closed. This was compounded by the sharp rebound we’ve seen since the summer and especially during the holidays.

The plant at Asahi Kasei Microdevices is still down following a fire in October, which affects advanced sensing devices used in automotive. This also contributed to the shortage.

There is some disagreement between what the news is saying about the chip shortage lasting through 2021, and what various management teams are saying about the chip shortage, which is the worst is over and the respective companies will meet or exceed this year’s guidance.

General Motors recently stated the situation has gotten better for them with CFO Paul Jacobson stating last week, “Over the last couple of weeks as we talked about this being a volatile situation, we’ve actually seen the situation get better. At this point, I would say that we’re highly confident about being able to hit our guidance that we put out to the Street.”

GM had temporary closed car and crossover plants in Kansas, Canada, and Mexico through mid-March yet Jacobson went on to add, “We feel confident that we’re working through this issue and that we’ll be able to return to normal as soon as the back half of this year … and a high degree of confidence that this isn’t going to be an issue for us going forward.”

Audi had to furlough 10,000 employees, yet CEO Markus Duesmann said the overall output for 2021 wouldn’t be affected as the company expects to make up for lost time in the second half.

According to Sony and the availability of the PS5, the President and CEO said, “It will get better every month throughout 2021,” he said. “The pace of the improvement in the supply chain will gather throughout the course of the year, so by the time we get to the second half of [2021], you’re going to be seeing really decent numbers indeed.”

Earlier this month, Senator Tom Cotton published a report entitled Beat China that points towards the weak supply stance for the United States as a matter of military and commercial importance. The wafer fabrication capacity of the United States is at 11% of global share down from 33% in 1990. South Korea currently leads with 25%, Taiwan at 22%, Japan at 16% and China at 14%

China’s rival to advanced CPUs in the United States is the HiSilicon Kirin 9000 designed in China, yet due to sanctions on Huawei, is not able to be developed. China’s chip foundry is Semiconductor Manufacturing International Corporation (SMIC) and is also on the blacklist. SMIC is capable of producing 14nm and has plans to produce 7nm chips, whereas competitors are already releasing 5nm chips. As of 2019, China was importing 90% of its chips.

Source: Gartner

Washington and special interest groups are concerned that China will surpass the United States in supply, and later in the race towards AI and 5G. For example, China has built the world’s largest 5G network with 720,000 5G base stations.

Source: https://macropolo.org/china-chips-semiconductors-artificial-intelligence/?rp=m

Qualcomm

By most standards, Qualcomm had an excellent earnings report. The blemish that sent the stock reeling at a 15% drawdown was the $40 million miss in revenue. Management had guided for 62% forward growth for this quarter of $8.20 billion at the midrange yet analyst consensus was 63% revenue growth, which became a top line miss at $8.23 billion in revenue compared to $8.27 billion expected. Margins expanded 900 basis points to 29%.

When a company meets management guidance yet narrowly misses analyst consensus, I tend not to be too concerned.

As stated, Qualcomm reported adjusted revenue of $8.23 billion compared to $8.27 billion estimated with sales up 63%. The company beat on earnings with adjusted EPS of $2.17 compared to $2.10 estimated, representing growth of 119%.

Chip sales grew 79% year-over-year to $4.22 billion and RF front-end chips used for 5G and modems were up 157% year-over-year.

Qualcomm’s RF products have crossed $1 billion in revenues. Qualcomm is now one of the largest radio frequency suppliers in the smartphone ecosystem, supporting end-to-end product applications, including 4G, 5G sub-6 bands, and 5G millimeter bands.

Automotive grew 44% to $212 million. The automotive pipeline has grown to $8.3 billion, up from $3 billion three years ago intending to reach $1.5 billion in automotive revenues by 2024. Qualcomm offers 4G LTE and 5G connected driving experiences with V2X, WiFi and Bluetooth to connect vehicles to the cloud. There are 150 million vehicles that use Qualcomm modems. The company is expanding into computer vision, AI and multi-sensor processing for the fourth-generation automotive platform to be used by GM, Google, LG and Panasonic.

IoT grew 48% and passed the $1 billion threshold. The company is also a leader in XR (AR/VR) and indoor/outdoor WiFi 6 connectivity.

Management guided for $7.2 billion to $8 billion in sales in the current quarter, which was higher than analyst expectations, or 46% growth at the midpoint. The company is guiding for adjusted EPS of $1.55 to $1.75 for the next quarter, representing 88% growth at the midpoint.

Qualcomm has over 800 designs using their 5G modems and RF solutions.

The company had estimated 225 million 5G handsets to be sold in 2020. The overall number of handsets declined 12% in 2020 across 3G, 4G and 5G. For calendar 2021, the company estimates 450 million to 550 million 5G handsets to be sold and for overall number of handsets to grow in the “high single-digits year-over-year.” The model expects COVID to affect the first half of the year with a second-half recovery.

Huawei expands Qualcomm’s serviceable market by about 16%, according to management on the earnings call.

From the earnings call, I tend to agree with this analyst who commented on the impressive RF growth and whether this will continue, which the new CEO indicates it will:

Joe Moore (analyst)Joe Moore (analyst)

Great. Thank you. I wonder if you can give us color on the growth in RF being so impressive when you look at 5G units potentially kind of more than doubling, when you look at millimeter-wave really at one customer and one region. I’m just surprised at how robust December is and kind of can you talk to the sustainability of those revenue levels and the growth drivers going forward.wonder if you can give us color on the growth in RF being so impressive when you look at 5G units potentially kind of more than doubling, when you look at millimeter-wave really at one customer and one region. I’m just surprised at how robust December is and kind of can you talk to the sustainability of those revenue levels and the growth drivers going forward.

Cristiano Amon (incoming CEO)Cristiano Amon (incoming CEO)

Hi, Joe, it’s Cristiano. Yes, it’s very consistent to what we have been saying since the beginning of 5G. We saw 5G as an entry point for us. We have a highly differentiated solution with our modem-to-antenna platform and all of those designs. I think we updated the design count now 5G is in excess of 800 designs. They all contain 5G RF front-end components.

Also we like that it’s very diversified RF front-end revenues across our customers, also with a lot of sub-6, it’s not only millimeter-wave, even though we are very happy with the expansion prospects of millimeter-wave and that’s definitely an accelerator for Qualcomm.

So, it’s a business which is now one of the fastest-growing [businesses] we have. We’re happy we achieved the threshold of $1 billion and we’ll continue to grow as we grow 5G.

There were many hints on the earnings call that Qualcomm should have a strong 2021 performance. First, the company is expecting 5G handsets to double year-over-year in addition to overall handsets recovering from negative growth to single-digit growth. The company is also supplying both Apple and Huawei and has inroads to new market opportunities, such as IoT and automotive.

So, really what our guidance — just to reiterate it, we are saying the market was down 12%, 2019 to 2020 — calendar 2019 to calendar 2020 and would grow in high single-digits from 2020 to 2021 and this reflects kind of continuing COVID impact in the first half and then recovery in the second half.

Really within that market, what’s the critical driver for us is how 5G plays out. And so if you look at our 5G forecast, we’re expecting it to go up from 225 million in calendar 2020 to a midpoint of 500 million. So, very strong growth and that’s kind of the key driver for us in terms of how our revenue expands on the chip side.And so if you look at our 5G forecast, we’re expecting it to go up from 225 million in calendar 2020 to a midpoint of 500 million. So, very strong growth and that’s kind of the key driver for us in terms of how our revenue expands on the chip side.

And then maybe last thing I’ll point out is to Cristiano’s comment earlier, Huawei has been a very large OEM and it was — really from a chip perspective, it was mostly high silicon that was satisfying their demand.

Now, with the change in the market, we have kind of 16% of the market that was not available to us before being available. So, as we kind of look further out, we see this as a pretty material expansion of SAM for us., we have kind of 16% of the market that was not available to us before being available. So, as we kind of look further out, we see this as a pretty material expansion of SAM for us.

Nuvia Acquisition:

In January, Qualcomm announced plans to buy Nuvia, a company working on a core CPU design which can be used broadly in smartphones, next-gen laptops, infotainment systems and driver-assistance systems among other applications. The deal could lessen Qualcomm’s reliance on Arm should the Nvidia-Arm acquisition go through.

Nuvia uses Arm’s architecture but utilizes custom designs. The use of custom core designs through the Nuvia acquisition could improve margins for Qualcomm.

Nuvia was founded by “former star chip designers” from Apple and Google. The founders have worked on a combined 20 chips including Apple’s A-series microarchitectures that power the iPhone and iPad. Between them, the team also has more than 100 patents for their work in silicon. Although very little is disclosed about the stealth company and its chips, the general understanding is that the Nuvia team aims to bring the power-efficiency of mobile to the data center and in-between (i.e., edge computing).

Please note – many articles will state this is about competing with Apple’s M1 but I believe this is about Qualcomm’s desire to control the 5G market on other edge devices beyond laptops.

The management hints towards the Nuvia acquisition being much more forward-looking than PCs:

Our commitment to our high-performance processor roadmap was reflected in our recently announced proposed acquisition of NUVIA. We look forward to combining NUVIA’s world-class CPU and technology design team with Snapdragon to enable our ecosystem of customers to redefine computing performance, drive innovation, and deliver a new class of products and experiences for the 5G era.and deliver a new class of products and experiences for the 5G era.

QCOM comments on Supply Constraints:

Here is what Qualcomm said about supply constraints:

Qualcomm: Notably, our strong performance and outlook would have been even stronger had we not been supply constrained.

We are executing extremely well in our strategy to address many of the technical challenges of delivering a true modem-to-antenna 5G experience and capture a higher dollar share of content in smartphones.

This process continues through the successive releases of 5G currently under development as our foundational innovations, coupled with our ability to implement 5G in products and coordinated deployment in new verticals, continues to drive progress outside the handset industry.

Qualcomm believes the shortage will normalize by the second half of the year:

And in your opening remarks, you mentioned that revenue would have been higher if not for the shortages. Could you help us to quantify that some and then perhaps talk about the next couple of quarters, how that may play out if you recapture some of the business that you weren’t able to ship in the December quarter and how that proceeds?

Cristiano AmonCristiano Amon

Hi, Chris, this is Cristiano. Yes, happy to address. We have seen, I think, probably shortage across the entire industry. There is a couple of factors driving that. One is V-shaped recovery, I think, across many of the sectors that were present now. We saw acceleration of digital transformation also consistent with this trend of the enterprise transformation of their home.

And especially for Qualcomm and QCT, we have seen an opportunity with the expansion of addressable market. Huawei represent — or it represented 16% of the market that becomes available to us across all of our OEMs.

So, that’s driving a situation that demand is outpacing supply. We’re happy what we see right now on the premium tier, for example. In high tier, we see share gains in fiscal 2021 and we expect the situation to normalize towards the second half of the year.

Atomera

Atomera is still an all-or-nothing proposition and the recent earnings report saw a sell-off in the stock as the market attempts to figure out the company that executed the JDA.

The company started the earnings call immediately addressing the JDA with this quote. The only clue we were given is that it’s a foundry (or a company with a fab plant but probably the former):

“The JDA we recently announced marks a major milestone for Atomera, including a manufacturing license which will enable our customer to deposit MST film on its wafers in its own fab positioning them for fast integration and transition to production. Our release of MSTcad V1.0 simplifies customer evaluation of MST, which should extend our reach to new customers and technologies and shorten time to revenuewhich will enable our customer to deposit MST film on its wafers in its own fab positioning them for fast integration and transition to production. Our release of MSTcad V1.0 simplifies customer evaluation of MST, which should extend our reach to new customers and technologies and shorten time to revenue” -Scott Bibaud, President and CEO.

The company is pre-revenue at $0 in the fourth quarter of 2020 compared to $138,000 in the year-ago quarter. The company incurred a net loss of ($3.9) million or ($0.19) EPS. The losses were essentially the same a year-ago.

Fiscal year 2020 saw revenue of $62,000 compared to $533,000 in fiscal 2019. Net loss was ($0.79) EPS compared to ($0.84) in fiscal 2019.

The company had $37.9 million in cash and cash equivalents as of December 31st and completed an at-the-market equity offering to raise $24.2 million in cash through the sale of shares.

The company is guiding for $400,000 in Q1 revenue. Management states this is based on payments under the JDA, which could slip from Q1 to Q2.

Here is the exact statement: “We anticipate that our Q1 revenue will be $400,000 based on payments under the JDA. However, the recognition of this revenue will depend on future events and therefore could slip from Q1 into Q2. The JDA includes other milestones that could result in additional revenue in later periods, but we’re not in a position to forecast the timing or likelihood of those milestones.”However, the recognition of this revenue will depend on future events and therefore could slip from Q1 into Q2. The JDA includes other milestones that could result in additional revenue in later periods, but we’re not in a position to forecast the timing or likelihood of those milestones.”

In the opening remarks by the management, they stated they would disclose the customer once payment was received, which looks like it should be Q1 or Q2. This is likely why we saw a bounce in the stock following the sell-off.

Here is another comment about timing of disclosure by the CEO:

“On the Phase 4, in my remarks I mentioned, we’ll show a Phase 4 when we deliver IP to this first JDA customer. I think it corresponds closely with Francis’ comments on revenue. We expect — we probably expect it to happen this quarter, but it will happen near the quarter edge, so it could go into next quarter, but not very far away.”We expect — we probably expect it to happen this quarter, but it will happen near the quarter edge, so it could go into next quarter, but not very far away.”

Guidance for adjusted operating expenses in FY2021 is in the range of $14 million to $14.5 million driven by 300mm tool costs, engineers and GMA expenses.

Here are some additional comments that management made in regards to the Phase 4 JDA:

In January, we were able to announce a newly completed JDA with a major semiconductor company who is one of our existing Phase 3 customers. This is evidence of Atomera delivering on a critical step towards commercializing MST. This JDA will result in the first customer moving to Phase 4, since our agreement includes a manufacturing license, which gives our customer the right to install our process and deposit MST on wafers in their own fab.since our agreement includes a manufacturing license, which gives our customer the right to install our process and deposit MST on wafers in their own fab.

As you can see, our pipeline does not yet show them in Phase 4 because they have not met our strict criteria yet. For a customer to enter into Phase 4, we must have delivered to them our MST IP transfer package, which is typically done when the customer’s tool is properly configured, and we have received payment. At that point, we will update the status on our customer engagement chart.At that point, we will update the status on our customer engagement chart.

The company also highlighted specific ways MST can help the 5G market:

Our improved ability to combine MST CAD modeling with internal wafer runs has helped us bring both technologies closer to production worthiness. Today, we are witnessing growth of a new market in the rollout of 5G cellular. MST SP is targeted primarily at products that are battery-operated and RF SOI brings new design options for 5G front-ends.

As the large manufacturers of 5G cellular devices seek out ways to achieve competitive advantage, Atomera’s MST will be one of the options that can provide them with a leg up. This is the type of market transition which allows new technologies like ours to get a foothold and start expanding.

The company also discussed that work will begin soon on 300mm and 200mm wafers, which will help with the advanced nodes and lead to a higher average sales price. Over 65% of the semiconductor market uses 300mm wafers.

Epi deposition work by Atomera engineers in our new facility has been underway for the last few months, allowing us to get a running start qualifying MST on our new epi tool. We are very excited to take full possession of this instrument so we can accelerate our customer work on both 300 millimeter and 200-millimeter wafers with a fully state-of-the-art setup.

Perhaps most importantly, this is what management said about the semiconductor shortage:

“And one of the things that’s being experienced by the automotive industry, as you said, they’re having shortages on these analog products, among others. But really, I think one of the big things holding them back are the analog solutions, they tend to be manufactured on older production nodes that are using 200-millimeter wafers.

Now, the challenge there is that people built these factories for 200-millimeter wafers decades ago. And they can’t expand them anymore very easily. And even if they could build a new fab, they have a hard time getting a supply of the of the processing tools that are needed to make 200-millimeter wafers because it just not made anymore, everybody’s using 300 millimeter. So one of the things that MST can do is, we can actually take a product designed on a 200 millimeter wafer, and we can help them improve the performance to a point where they could shrink the devices, maybe get something like a 20% or 25% shrink opportunity. What that means is that every single wafer would be able to make 25% more capacity. So for a manufacturer, that means it could get 25% more capacity out of a fab without having to add a whole bunch of new equipment and so forth.Now, the challenge there is that people built these factories for 200-millimeter wafers decades ago. And they can’t expand them anymore very easily. And even if they could build a new fab, they have a hard time getting a supply of the of the processing tools that are needed to make 200-millimeter wafers because it just not made anymore, everybody’s using 300 millimeter. So one of the things that MST can do is, we can actually take a product designed on a 200 millimeter wafer, and we can help them improve the performance to a point where they could shrink the devices, maybe get something like a 20% or 25% shrink opportunity. What that means is that every single wafer would be able to make 25% more capacity. So for a manufacturer, that means it could get 25% more capacity out of a fab without having to add a whole bunch of new equipment and so forth.

So yes, I would say this is something that it’s not going to probably help the manufacturers in the very near term. But long term, I think it’s going to be a continuing problem, and our technology really provides a good solution for it.”

Lam Research

This was a record quarter for Lam and next quarter is expected to be another record quarter. The CEO made comments in the recent earnings call that reflect my understanding of the opportunity ahead of the semiconductor industry:

While today’s absolute levels of WFE are significantly higher than a few years ago, we believe the rapid digitization of the global economy combined with rising capital intensity due to greater process complexity supports robust multi-year WFE spending. In fact, if there’s a common theme that underpins our outlook for the next several years, it is that sustainable growth throughout the semiconductor value chain will be driven by the proliferation of artificial intelligence, high performance computing, IoT, 5G, and the incredible societal advances and user experiences these technologies enable.it is that sustainable growth throughout the semiconductor value chain will be driven by the proliferation of artificial intelligence, high performance computing, IoT, 5G, and the incredible societal advances and user experiences these technologies enable.

We expect strong demand from a diverse set of end-use markets to positively impact semiconductor and semiconductor equipment growth in 2021 and beyond.expect strong demand from a diverse set of end-use markets to positively impact semiconductor and semiconductor equipment growth in 2021 and beyond.

To illustrate, management spoke about gaming as a category expected to grow at 50% CAGR. The number of consoles shipped is much less than mobile, however, the GPU is four times the size with 2X the DRAM bits, leading to a 5% upside for Lam and $500 million incremental WFE (wafer front end equipment).

Management also discussed 5G as a driver with 5% incremental demand in 5G resulting in $1 billion of incremental WFE. Management went on to say, “It is demand drivers such as these that have strengthened our conviction around the sustainability of WFE spending over a multi-year period.”

Because Lam is a supplier, the company predicts spending will be biased towards the first half of 2021. One drawback to Lam is the company’s dependency on China, which represents 30% of revenue and something we have to continually monitor. China is a big consumer of NAND and DRAM with $10 billion in spend last year.

Lam Research has one of the best bottom lines of any company in the technology industry. The company reported EPS of $6.03 in the current quarter compared to analyst expectations of $5.64. In the year-ago quarter, Lam reported EPS of $4.01. Revenue came in at $3.46 billion, up 33.78% from $2.58 billion a year ago.

Management guidance for the upcoming quarter is higher at $3.7 billion with EPS of $6.47 which beat analyst estimates of $3.31 billion with EPS of $6.55. the current analyst estimates have been revised to reflect management guidance.

Gross margin in the current quarter was 46.4% and management is guiding for gross margin of 46% in the upcoming quarter.

Lam is expected to close fiscal year 2021 that ends in June with $13.9 billion in revenue, representing top line growth of roughly 40% up from $10.04 billion. For the fiscal year 2021, EPS is estimated to be $24.77 for growth of 66%, up from $15 EPS in FY2020.

Nvidia

Similar to Lam, the management from Nvidia outlined many edge cases that will continue to drive growth for the semiconductor industry including the strength in hyperscalers from the adoption of AI, deep learning recommendations across the internet and ecommerce, and the industrial data center, which includes things like weather simulation, genomics, molecular dynamics simulation, quantum chemistry, and simulating quantum computing.

On the industrialization of AI, the company is working with 7,000 startups plus corporations like John Deere and Wal-Mart on robotics machines. Jensen Huang compared this to the smartphone where the connected device will continually improve with AI the way applications continually the mobile device.

The third phase is the industrialization of AI. And some of the great examples when I say in terms of smartphone moment, I meant that it’s a device with AI, it’s autonomous and it’s connected to a cloud service, and it’s continuously learning. So some of the exciting example that I saw, that I’ve seen and we’re working with companies all over the world, we have some 7,000 AI startups that we’re working with, and almost all of them are developing something like this. And large industrial companies whether it’s John Deere or Walmart, they’re all developing applications kind of like this.

… They’re not going to just be products that you buy and use from that point forward, but it likely be a connected device with an AI service that runs on top of it.

The company acknowledged the industry was supply constrained but that due to proper planning, Nvidia will not see the effects in its data center segment. However, the market is timid regarding management’s statements that gaming will drive the majority of the growth sequentially.

Nvidia posted revenue of more than $5B for the first time, up approximately 61% YoY, beating expectations by $180M.

Adjusted EPS of $3.10 beat by $0.29. GAAP EPS of $2.31 beat by $0.33.

Gaming and Data Center also hit new records. Gaming saw $2.5B in sales, up 67% YoY, and data center sales hit $1.9B, up 97% YoY.

For the full year, revenue was $16.68B, up 53% YoY. GAAP earnings was $6.90, up 53% YOY. Adjusted earnings per diluted share was $10, up 73% YoY.

The company also provided strong guidance, with revenue of $5.3B, plus or minus 2%, versus expectations of $4.51B.

Gaming has become an integral part of global culture and will remain robust going forward, said Nvidia Executive Vice President and CFO Colette Kress during the call. She also expressed optimism about growth in virtual experiences, data center, and AI.

“We are on the cusp of a new age in which AI fuels industries ranging from healthcare to scientific research to the environment,” Kress said. “With this transaction, our vision is to boost Arm’s potential so it can thrive in this new era and grow into promising new markets.”

Marvell and Inphi: Acquisition Analysis

Posted on November 5, 2020June 30, 2026 by io-fund

Previous Analysis Referenced in this Report:

b69daa12-bd66-49dd-b78b-e97240767c9f_Marvell-and-Inphi-Acquisition-Analysis.pdf

Marvell and Inphi: Acquisition Analysis

It’s not every day that we see this level of consolidation across key players in the semiconductor industry.

As stated in the AMD-Xilinx PDF, Marvell’s ASICs were becoming favored in 5G for various reasons, including power consumption and lower cost over time. The 5G product-market fit compliments Inphi’s recent trials with Verizon, which were deemed successful in September for supplying interconnects across its content delivery network.

Many of my readers ask me about edge computing in relation to momentum stocks. Marvell-Inphi with customers like Samsung and Nokia on infrastructure and Verizon or AT&T for the network are at the center of edge computing.

On that note, Marvell-Inphi promises to be a challenging acquisition to analyze. For one, it is not a common household name or even among the most recognized in semiconductor names (although we have already tackled both separately). For two, Marvell’s fundamentals do not show its potential – and this is key to understanding the opportunity. Three, Marvell is taking on a sizable debt load to acquire Inphi. Fourth, the market may take time to figure out the potential of this acquisition as the synergy is forward-looking.

The conclusion here is that we are very bullish and this PDF serves as our investment thesis.

The $10 Billion Strategy Behind Inphi

I’ve seen editorials written by some journalists believe that Nvidia “wants it all” as the Arm acquisition takes the GPU-leader outside of the data center for AI and ML workloads.

Well, AMD-Xilinx and Marvell-Inphi are here to say that Nvidia will not “have it all.” Perhaps Nvidia will lead in general artificial intelligence use cases, and now edge devices with Arm if the acquisition is approved, but AMDXilinx will be a serious player in more complex AI and ML computing tasks, for example space and autonomous vehicles. These are two areas where Xilinx shows strong growth and AMD can lower the barrier to entry for developers. The exact use cases and demand for AMD-Xilinx would be hard to predict but will be greater than the two parts of owning CPUs and AI acceleration with FPGAs.

However, for Marvell, the door is wide open on 5G and this has been confirmed by customers in the critical hour for 5G infrastructure. The Nokia Q3 2019 earnings call, which I have referred to many times, is not to be taken lightly as it sets the stage for an important shift in the chip of choice for major 5G players. Below, we see Intel’s ongoing stock price decline and AMD and Marvell’s positive price action.

Due to the timing of this acquisition and the product road map for both Marvell and Inphi, I see this as a big move by Marvell to own 5G base stations and compute plus now photonics for edge computing (intricately linked to the 5G buildout).

The majority of analysis written on this acquisition will discuss how it strengthens Marvell’s position for the data center due to silicon photonics as Marvell is mainly copper right now. Data centers are a core market to help stabilize Marvell against competitors but the growth opportunity for Marvell (and the reason I am investing) is for the lead Marvell currently has in 5G.

We have covered both Marvell and Inphi on this site with full-length reports. You can access them here:

Marvell Technology: 2019 Analysis

Inphi: Premium Analysis

Acquisition Overview:

Last week, Marvell announced an agreement to acquire Inphi in a cash and stock transaction for $10 billion for a combined enterprise value of $40 billion. The transaction will generate an annual run-rate of $125 million within 18 months after the transaction closes.

The deal is expected to be accretive to Marvell’s adjusted EPS by the end of the first year after the transaction closes with an anticipated date in the first half of 2021. Ownership will be 83% Marvell and 17% Inphi.

Inphi is expected to add more than $750 million in annual revenue with operating-EBITDA margins in the mid-30% range. The proforma gross margins will be an estimated 63.5%.

Marvell will finance part of the transaction through JP Morgan Chase which will increase the debt on the balance sheet. The proposal is for $4 billion of new debt with $1.5 million in a committed term loan and $2.5 billion in a bridge loan commitment. Despite this, Marvell has stated in the Investors Presentation that the company plans to maintain the current dividend policy.

The new addressable market is placed at $23 billion with an acceleration in market growth of 12% CAGR.

Source: Investor Presentation

Financials:

Marvell:

Marvell released Q2 results on August 27 with revenue growth of 11% year-over-year to $727.3 million. EPS was $0.21 on adjusted income of $140.4 million compared to $0.16 EPS on $110 million last year.

For Q2, the company had cash of $831 million and debt of $1.4 billion. Free cash flow in Q2 was at $205.2 million. The company stated Q3 revenue would be $750 million +/- 5%. The next earnings release will be on December 3rd.

TTM revenue was $2.80 billion with net income of $1.41 billion and EPS of $2.09.

Inphi:

Inphi released results on October 29th. Revenue grew by 92% year-over-year to $180.7 million. Adjusted EPS was $0.88 on adjusted income of $47.9 million compared to $0.45 EPS on $21.5 million last year.

Management forecasted Q4 revenue to be in the range of $185 million to $189 million. Adjusted net income in the range of $47.2 million to $50.6 million at $0.85-$0.91 EPS.

TTM revenue was $598.1 million with an adjusted loss of $61 million for EPS of ($1.29).

Inphi had cash and marketable securities of $223 million and debt of $508 million as of September 30th. Free cash flow in Q3 of $13.4 million.

More on Valuation …

The acquisition to acquire Inphi will be paid in 60% stock, with the remaining 40% in cash. The transaction will include $66 in cash and 2.323 shares of the combined company for current Inphi shareholders.

The cash and stock deal will value Inphi at approximately $10B at its purchase price. Marvell shareholders will have an 83% stake in the combined company and Inphi shareholders will command a 17% stake on a fully-diluted basis.

Marvell plans to close the acquisition in H2 2021, financing the deal with current cash on hand and obtained debt financing. At the $10B purchase price, Marvell will be paying 12.4x 2021 revenue to acquire Inphi. This valuation is on the steeper side, but Inphi recorded 92% YoY sales growth in its most recent quarter compared to just 11% growth for Marvell. In this sense, the deal will be accretive to revenue growth, gross margins, and operating margins.

On a Pro Forma basis, the acquisition of Inphi will improve Marvell’s growth rate, gross margin, operating margin, and EBITDA margin. The acquisition will also double Marvell's number of $100M+ cloud & networking customers to 8.

Marvell currently trades at 7.4x 2021 revenue and the acquisition of Inphi to drive higher growth should eventually lead to a higher multiple. As stated under Financials, the deal is expected to expand Marvell’s TAM to $23B in 2023 and accelerate market growth to 12% CAGR.

1-year returns for Inphi and Marvell:

1-year forward price-to-sales across semiconductors:

What Analysts Have to Say:

10/30: Marvell upgraded to Buy from Hold at Craig-Hallum Craig-Hallum analyst Christian Schwab upgraded Marvell (MRVL) to Buy from Hold with a price target of $48, up from $44 following the company's announcement to acquire Inphi (IPHI). Schwab agrees with management that the acquisition of Inphi will help transform Marvell into a faster growing cloud and 5G player. The acquisition improves Marvell's long term growth outlook to 12%16%, from 10%-15% alone, Schwab says, adding that with synergies, the combined company offers long-term investors an attractive long-term model.

10/29: Morgan Stanley downgrades Inphi, raises Marvell price target after takeover deal. As previously reported, Morgan Stanley analyst Joseph Moore downgraded Inphi (IPHI) to Equal Weight from Overweight with a price target of $159, down from $162, following Marvell's (MRVL) announcement of a cash and stock deal to acquire the company. Moore, who thinks the two businesses "fit together nicely," raised his price target on Marvell shares to $40 from $37 following the deal announcement. He keeps an Equal Weight rating on Marvell shares, stating that although the company has used M&A to put themselves in a better position, its legacy Marvell businesses are "struggling."

10/20: Keybanc analyst John Vinh resumed Marvell coverage with overweight rating and $55 price target due to $1 billion 5G revenue potential stating "MRVL is one of the best-positioned companies to benefit from the inflection in 5G infrastructure deployments." The analyst cites 35%+ operating margins and believes Marvell will achieve over $1 billion in 5G revenues by FY23-24.

Note: this analyst is guiding up from $600M in annual 5G revenue that Marvell’s management guided previously.

Fitch: In addition to the analyst comments, Fitch Ratings revised Marvell from Positive to Stable with a credit rating of BBB-. The outlook takes into consideration that the combined revenue growth “may fall short of forecasts, and provide insufficient profitability and cash flow to return elevated leverage metrics.”

Despite Fitch expecting strong design wins and annualization of acquisitions during fiscal 2020 that drives the FCF margin into the teens from 4.2%, the debt to operating EBITDA will nearly double from 1.9X to 3.5X pro forma.

Fitch believes Marvell is stronger in market position than both Micron and Broadcom and is in-line with NXP. The key assumptions include strong design wins for Marvell especially in networking, driving growth acceleration to mid-to-high single digits compared to the overall semiconductor industry growing at low-single digits in the forecast period. Fitch also forecasts operating EBITDA and cash flow margins to expand. The company also forecasts shareholder returns to be “flattish” until debt-to-operating EBITDA returns to 2X.

Patrick Moorhead, a semiconductor specialist for Moor insights, has positive things to say about the data center opportunity with Marvell’s strong positioning in copper networking and now adding Inphi’s silicon photonics for networking. He references Marvell’s DPU and storage networking as a solid synergy with Inphi’s photonics interconnects.

Product Overview:

Inphi will add silicon photonics to Marvell’s copper-based networking. Both companies are in the networking layer with Inphi stronger on data centers and Marvell stronger in 5G (competitively speaking). Together, they will expand the footprint in both the data center and 5G arenas.

Some analysts critiqued AMD as having less-than-desirable M&A history. Marvell, on the other hand, pushed into 5G very successfully following the Cavium acquisition. This leads many analysts to believe the Marvell-Inphi acquisition will follow the same path to strengthen Marvell’s positioning in the data center.

However, as stated, I believe the impetus could be Marvell’s 5G and edge networking strategy. Networks like Verizon badly need Inphi’s interconnects to drive high-speed connections between its content delivery network servers, which are expanding their footprint for 5G. The data center is an all-out battleground with lots of big tech throwing around muscle. However, specifically in 5G, Inphi can help solidify Marvell’s lead and perhaps help dig a moat for Marvell’s ASICs.

When it comes to data center networking, however, there is no moat of any kind to be had. For example, Mellanox is a competitor on networking ethernet and has the 800-pound weight of Nvidia behind the company. Therefore, did Marvell take on a 3.5X debt-to-EBITDA ratio to be a small fish in a big pond? I don’t think so when Marvell can be the big fish in the 5G pond.

Data Center:

We discussed Inphi at length in this PDF but will summarize a few points below. You can access the Inphi full-length report here. e Inphi full-length report here.

Inphi is the leader in PAM4 electro-optics. This market has seen tailwinds due to data center spending and the need for more bandwidth from COVID’s streaming and traffic usage. As stated in the PDF, we expected Inphi’s growth to continue on an investable trajectory due to its aggressive product road map for fiber optics that connect both short distances (PAM4 DSP) and long distances (coherent DSP).

Regarding the product road map, Inphi currently supplies 400-gigabit PAM4 pluggables that are made with a 7nm process compared to a 16 nm process which reduces power consumption. Artificial intelligence and data center switching will drive the demand for 800-gigabit PAM4 modules to increase the speed of input-output and to process the data flows. Inphi announced the industry’s first 800-gigabit client-side pluggable modules earlier this year.

Part of the 2021 story for Inphi is the release of the Spica DSP (the aforementioned 800-gigabit PAM4) which is expected to be deployed in volume. This will double the throughput (bandwidth) due to an 8x100Gpbs optical transceiver. The main application for the 2021 story is the transition of optical connectivity inside and between AI clusters.

COLORZ II is the other half to the 2021 story for Inphi as the silicon photonics technology increases metro-access bandwidth to facilitate edge computing through a “network fabric.” COLORZ allows regional data centers to be linked together in the same metro region to function as one single mega data center. Verizon recently completed an important trial using Inphi’s COLORZ II optics.

In March of 2019, Marvell released a new Ethernet switch solution for edge and private data centers. The solution uses compostable infrastructure, which allows for compute, storage and networking to be managed by software and removes the need to configure by hardware. This is one example of how Inphi and Marvell can complement one another.

To elaborate more on PAM4-based connectivity …

Hyperscalers are going through an ongoing upgrade cycle that requires high bandwidth and port density. PAM4 connects networking ASICs and machines, like servers and AI machines. Digital-based PAM4 uses analog-to-digital converters to clean up the signal in the digital domain before converting it back to analog to transmit. This allows developers to configure various deployment scenarios via software. This software configurability is a compatible match with Marvell’s ASICs.

Semiconductor experts will tell you that silicon photonics connecting hyperscalers and network carriers are the future. This is the primary architecture for edge computing — hyperscalers and 5G networks connected regionally with solutions like what Inphi offers.

We mentioned in the PDF that Microsoft is a large customer for Inphi’s COLORZ DCI product including for global build-outs related to the Pentagon contract. I’ll place the quote here from the Inphi PDF – which should be strengthened under Marvell:

“As I discussed on our prior earnings call, we're still consistently expecting our ZR solution to go to production in the first half of 2021 and ramp into volume starting in the mid-2021. And so you should expect the second half of 2021 to be a significant revenue driver coming from the 400-gig ZR solution at multiple cloud data centers as well as telecom operators.” And so you should expect the second half of 2021 to be a significant revenue driver coming from the 400-gig ZR solution at multiple cloud data centers as well as telecom operators.”

Marvell supplies the data center with Thunder X2 Arm-based processors which provides the computational performance of an Arm server with I/O connectivity, memory bandwidth and capacity. Nvidia partnered with Marvell to port the CUDA-X AI libraries and tools to the platform.

Marvell also offers DPUs, which require an analysis of their own as Nvidia plans to compete here. Briefly, DPUs stand for Data Processing Unit and will become more commonplace in the future as they move data around the data center. Its roots are a system-on-a-chip (SoC) and is software programmable. Marvell will become a major player here and this is a future bull thesis for Marvell in addition to the current thesis outlined here.

5G Infrastructure:

As stated in the Investors Presentation, Marvell leads with base station compute. This sets the bandwidth bar and cadence while Inphi adds the fronthaul and backhaul interconnect.

Marvell supplies components for 5G base stations with Nokia and Samsung as customers. Although Marvell has exposure to Huawei, these two suppliers can make up for this exposure in time.

We have covered ASICs in detail in both the Marvell PDF and the AMD-Xilinx PDF. ASICs stands for applicationspecific integrated circuit and are customized to perform one very specific function. Recently, 5G infrastructure has favored ASICs over FPGAs – which is key to the success that Marvell has seen in 2020 and beyond. One driving factor is that ASICs cost less over time while rivaling FPGAs on efficiency and power.

The main point here is that Marvell has a serious opportunity to be the front-runner in 5G infrastructure. The 5G network will soon rival cloud infrastructure on data and processing, and therefore, I believe quite a bit of Marvell’s strategy with Inphi resides in the interconnects increasing the speed of the 5G network and reducing capex by removing steps in the network layer.

As stated in the Marvell PDF, the company is attempting to offer end-to-end network infrastructure with baseband DSPs, Arm multi-core SoCs (system on chips), purpose- built hardware accelerators, Ethernet connectivity engines and system-level security solutions.

Although Marvell aims to offer specific-use ASICs and semi-custom ASICs, the 5G platform that Marvell offers will be adaptable for many use cases to expand on any ASIC limitations. Adding Inphi to this will strengthen the endto-end network infrastructure offering by Marvell.

This matters when you analyze supply and demand. To me (as an investor), the data center with DPUs/Liquid IO, Thunder X Arm-based platform and now Inphi’s silicon photonics are the core business but the demand for 5G and edge networking are the tailwind and growth opportunity that I am primarily keen on for 2021. With that said, I don’t want to overlook Marvell’s potential with DPUs in 2022-ish.

With Inphi, Marvell has the potential to own edge networking with very few competitors on ASICs and silicon photonics in this arena whereas the data center is highly competitive. Inphi’s solutions connect edge switches (and core switches) over both short and long distances (the long distances being more important for 5G), which along with Marvell’s lead on base stations, is a strong combination for the 5G build-out.

Lam Research: Premium Analysis

Posted on March 31, 2020June 30, 2026 by io-fund

6b4ae414-df00-4cd5-9374-8f23dd501538_Lam-Research-Premium-Analysis.pdf

Lam Research: Premium Analysis

Lam Research

Introduction:

Lam Research is cash efficient with forward guidance that shows earnings will grow at a rate that is rare to see in the semiconductor space. There is a 1.5% dividend, an exceptional buyback schedule and adjusted forward earnings per share of $20.34 for FY 2021, up from $16.05 for FY 2020. The $4 EPS increase in adjusted forward earnings in 2021 alone is more than Nvidia, Qualcomm, Taiwan Semiconductor, AMD or Qorvo’s respective EPS.

Lam Research’s forward EPS is nearly double Broadcom, in second place.

Lam Research has best-of-class etch processing equipment. The majority of its revenue comes from supplying NAND and DRAM memory manufacturing. The company provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies.

Front-end wafer processing solutions from Lam Research help to create chips and applications for edge devices. Wafer processing create transistors, capacitors and wiring for semiconductors.

Lam Research’s customers span across Micron, Samsung and Intel. Analysts covering Lam Research like to point out that the company is protected from supply and demand as memory manufacturers will continue to buy from Lam Research even during a low point in the cycle. This was proven during 2015 when Lam Research did not feel the effects of the memory trough.

With that said, Lam Research is not entirely immune to supply chain issues as fiscal 2018 to fiscal 2019 reported a 13% decline.

Financials:

The company released its Q2 fiscal year 2020 results on January 29, 2020. Revenues grew 2.41% to $2.58 billion with trailing twelve-month revenue at $9.55 billion. This is slightly lower than FY 2019 revenue reported in the quarter ending in June with Lam Research’s fiscal year beginning July 1st.

Net income fell 11% year-over-year to $514.5 million in Q2. Earnings per share were $3.43 compared to $3.09 for the previous quarter and $3.51 for the same period last year. Adjusted earnings per share came in at $4.01 compared to $3.18 in the previous quarter.

Historically, revenue grew 18% from fiscal 2016 to fiscal 2019 although declined in 2018 due to trade war issues.

Gross margins are at 45.7% compared to 45.3% in the 1Q FY 2020, which is average for a semiconductor company. The company has cash and cash equivalents of $3.03 billion at the end of the Q2 compared to $4.6 billion at the end of the Q1. The company reported cash and cash equivalents and investments of $4.9 billion compared to $5.8 billion at the end of Q1.

This was due due to $1.0 billion of share repurchases, dividend payment of $166.7 million and capital expenditure of $62.1 million. These outflows were partially offset by $307.9 million of cash generated from operating activities.

The company has long-term debt of $4.4 billion with current debt of $667 million. The operating cash flows were $307.9 million in fiscal Q2 2020 compared to $464 million in Q1 2020 and $642.4 million in Q4 2019.

Forward Guidance

The median revenue forecast for fiscal 2020 was $10.23 billion for an increase of 5.7% and $11.87 billion for fiscal 2021 beginning in July. However, the company recently withdrew financial guidance for Q3 2020 due to the company being located in California where non-essential companies have “shelter in place” restrictions.

According to the recent investors day presentation, the company expects revenue to reach $14.5 billion to $15.5 billion for 2023/2024. This assumes a water fab equipment market assumption of $60 billion up from a market of $46 to $47 billion in the current year. If the market is more bullish by this time frame, the addressable market estimate for WFE is $70 billion with Lam Research’s revenue at $17 billion and EPS of $36.

The company also announced that it will return 75% to 100% of Lam Research’s free cash to investors, up from a previous target of 50%, and will also boost its dividend each year. Please note, this was stated at the start of the coronavirus disruption and prior to California’s closure of nonessential businesses.

According to the earnings call, NAND demand is expected to be strong in calendar year 2020. The company expects to see growth in water fab equipment of $8 billion to $10 billion this year due to strong spending in foundry/logic (over memory). The company stated early signs of improvement in NAND spending with DRAM more in the longterm.

Services growth will be important to watch in the next quarter and into the future. According to management on the earnings call, services grew 30% year-over-year with multi-year contracts that provide recurring revenue to the company. The expectation is that services will outgrow the installed base with growth of 10-11% year-overyear.

The company’s decision to buy Novellus Systems for $3.3 billion in 2011 helped the company to gain a leading position in the deposition segment. More recently in the earnings call it’s mentioned that the atomic layer deposition (ALD) is another area of growth. The company is gaining market share because of best-in-class film properties along with hyperactivity and low defects.

Valuation:

Lam Research has a more attractive valuation a month ago as the price is down 25% from the Febuary peak. However, it’s important to note this was more of a reversion to the mean rather than a deep discount as Lam Research is now trading at its 5-year average across nearly all valuation metrics.

Click here to view spreadsheet.

What I like about Lam Research is its cash flow and also the company’s cash on hand relative to annual revenue.

Applied Materials reported $14.6 billion in revenue last year yet similar cash reserves of $3 billion as Lam Research with $9.6 billion revenue. The 5-year free cash flow growth rate for Lam Research is 38.12% compared to Applied Materials at 12.47%.

The 5-year free cash flow growth rate for KLA is 7.52%. This is a significant spread on free cash flow and the comparables.

Notably, Lam Research has higher forward revenue estimates of 17% compared to AMAT at 13.45% and KLA at 10.59%. When averaged over the next two years, Lam Research has similar revenue to both comparables.

Earnings are similar across Lam Research and Applied Materials, although when you add in shares outstanding, Lam Research is set apart with 160 million shares compared to Applied Material at 945 million shares, which results in a much higher EPS for Lam Research.

This, in turn, will allow Lam Research to do more buybacks and pay a dividend, which will attract a wide range of investors (value investors for the free cash flow, dividend investors for income, and growth investors for the memory market, stability from equipment sales and few competitors on etch).

It’s anyone’s guess as to what exactly the market has priced in with the Coronavirus as the company has not issued a revised guidance at this time other than to withdraw its current guidance (see below).

Due to global economic conditions, the headquarters being shut down, and uncertainty in demand for NAND, some discount from the five-year average would be ideal.

During the trade war, Lam Research traded at a PE ratio of around 10 and during the Q4 2018 selloff, the stock traded around PE ratio of 9. We have yet to see Lam Research trade at these levels during the Coronavirus/March bear market as it’s remained at a PE ratio of 13 or above. With that said, a forward PE ratio at 9 would be reasonable when comparing the last two sell-offs in tech and semiconductors.

When looking at EV/EBIT, Lam has also remained above its Q4 2018 selloff and China trade war valuations.

Some of the hardiness we are seeing in semiconductors during the March lows reflects the fact that a pricing surge was expected this year, yet as noted below, analysts and manufacturers are mixed on whether this will occur now due to a lack in demand (not supply).

The majority believe the pricing surge will be much softer than previously estimated to flat while Gartner is calling for 10-15% increases in pricing (see below).

COVID-19 Impact

Multiple San Francisco bay area counties issued shelter-in-place order. The company needs to temporarily stop on-site work at its Fremont and Livermore locations for three weeks effective March 17, 2020. As a result of these implications the company’s manufacturing activities in the two California facilities will be disrupted and parts from key suppliers will be impacted. The company has withdrawn the March quarter 2020 financial guidance.

The company also has supply chain activities in Malaysia, and on March 16, 2020, the Malaysian government issued orders to close certain business activities from March 18 to March 31, 2020.

Lam Research saw a 43% drawdown from its February peak and is currently trading down 24%. Meanwhile, analysts are mixed on the semiconductor market recovery following COVID-19 shutdowns.

On March 20th, Mizuho analyst Vijay Rakesh upgraded the stock from neutral to buy. Rakesh expects a rebound in the second half of 2020 and into 2021 based on the expectation for growth in NAND, DRAM, and etchequipment spending. The analyst mentions valuation is cheap compared to the historical average.

Regarding COVID-19 Rakesh states, “While (first half of 2020) wafer-equipment spending will likely be impacted from COVID-19, we see a better (second half 2020) by the need to add capacity to tight memory supply, and foundry/logic WFE spending given strong seasonal 5G handset demand, a strong data center outlook and 7nanometer/5-nanometer ramps.”

Evercore names Nvidia, Lam Research, and ASML as top ideas for long-term investors amid the “incredibly uncertain” demand picture. Meanwhile, B.Riley analyst Craig Ellis downgraded the 10 chips companies, writing that he “underestimated potential for a risk” from outbreak of COVID-19.

Morgan Stanley analyst says that the company’s analyst day featured “several incremental positives,” including a strong earnings target and a higher FCF return plan. The firm sees Lam Research as a core holding, but “can see more upside elsewhere around the theme of memory improvement.” (Note: is likely this analyst is referring to Micron as Morgan Stanley is bullish on Micron).

Addressable Market and Valuation

According to Gartner the worldwide wafer fab equipment market is expected to reach $53.6 billion in 2020, down 1% from 2019. According to the March Investors presentation, Lam Research has outperformed water fab equipment (WFE) growth 2:1. Lam Research’s revenue grew at a CAGR of 16% from 2013 to 2019 and WFE grew at a CAGR of 8% in the same period.

Lam Research’s customer list includes Micron Technology, Samsung Electronics, SK Hynix, Toshiba, TSMC, among others. In 2019, Lam Research was also named a preferred supplier for Intel.

Geographically, Lam Research is weighted towards China at 29% and Taiwan at 26%. The United States makes up 9% of Lam Research’s revenue.

NAND is primarily driven by smartphones, including SSD and memory cards. The global 3D NAND flash memory drive market size was $9 billion in 2017 and is projected to reach $99 billion by 2025, growing at a CAGR of 35.3%. Asia-Pacific will be a strong contributor to global share at nearly half of the market at $48 billion. Key players for

NAND include Samsung Electronics Co., Ltd., Toshiba Corporation, SK Hynix Semiconductor, Inc., Micron Technology, Inc., Intel Corporation, Apple Inc., Lenovo Group Ltd., Advanced Micro Devices, STMicroelectronics, and SanDisk Corporation.

Statista places the size of the dynamic random-access memory market worldwide at $63.5 billion in the current year, growing to $83.4 billion by 2024. DRAM memory is used in smartphones and tablets and the increasing demand for online operability and internet connectivity.

Low-power consumption and high-density memory technologies, such as DRAM, are also used in data center infrastructure due to cloud services requiring cooling, high speed data transmission and back-up facilities.

According to IC Insights, NAND Flash sales declined 27% in 2019 and will rebound at 19% in 2020. DRAM sales declined 37% in 2019 and will rebound 12% in 2020.

Source: IC Insights

However, COVID-19 shutdowns may soften the pricing surge that was beginning to form due to demand. The weakened forecast comes from an uncertainty in consumer spending on mobile phones and devices that use chips. If major hyperscalers curb their spending in the second half, as discussed by TechTarget, then flash and SSDs will be impacted. Others agree that there’s unlikely to be shortage this year in memory and that NAND flash, SSDs and DRAM should remain at a reasonable price. In contrast, Gartner continues to believe NAND flash will see a 10-15% increase in pricing with SSD prices likely higher.

Product Overview

Lam Research manufactures equipment for semiconductor companies. The company serves the etch, deposition and clean markets with a specialty in 3D NAND flash and advanced DRAM.

As the market leader in etch, Lam Research supplies a critical process in chipmaking where excess material is removed. Lam Research also produces deposition equipment, which applies thin-film layers to surfaces.

This month, the company announced the Sense.i platform, which has a space-saving architecture and will help customers meet wafer output targets “by producing more than 50% improvement in etch output density.” The company describes the platform as self-aware due to autonomous calibration that helps reduce downtime and labor costs while the tool self-adapts to maximize wafer output. The platform also has a small footprint, which helps as manufacturers increase the complexity of their processes.

The majority of its revenue comes from supplying NAND and DRAM memory manufacturing. The company provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies.

NAND memory saves data even when the power is removed, like when a cell phone is turned off. DRAM only saves memory when a device has power but is much faster than NAND and lasts longer. Beyond mobile devices, NAND is found in traffic lights, digital advertising panels/displays, and anything with artificial intelligence that needs to store data. NAND has been around since the 1980s but got a much-needed boost from 3D NAND, which stacks vertical memory chips. I’ll cover 3D NAND in more detail in the upcoming Micron research report.

Catalysts for Lam Research include FinFET and planar for 3D NAND with multiple patterning and vertical layers. 3D NAND spans single-level cell (SLC), multi-level cell (MLC) and triple-level cell (TLC). As chipmakers must battle each other for more power per chip while often in pricing wars, equipment providers like Lam Research can provide an advantage through superior tools. There are more layer-counts in 3D NAND and foundry/logic transitions to the process node that require greater multiple patterning steps. Upgrades from the planar to 3D NAND have been strong drivers for Lam Research’s double-digit revenue growth although these upgrades may level off in the future.

For Lam Research’s customers, Moore’s Law states that the number of transistors on a microchip doubles every two years although the cost of computers is halved. Superior equipment providers (like Lam Research) can help stave off the effects of Moore’s Law for their customers by helping to deliver high-volume manufacturing.

The competitive advantage for Lam Research is the lead it has from service contracts and customer collaboration for high-volume manufacturing. It would be challenging for new competitors to compete with the scale and resources that Lam Research has. Lam Research has an installed base of 61,000 chambers as of the end of December 2019, up from 40,000 units in 2015. The company is also driving more revenue per chamber. New technologies like “Sense.i” deliver significant productivity and throughput improvements. The tool will be delivered to all major customers to increase manufacturing rates.

Lam Research merged with Novellus in a $3.3 billion stock deal in 2012 to become a market leader in deposition materials. In 2016, an attempt to merge with KLA-Tencor was shot down.

Lam Research is also releasing an advanced atomic layer deposition (ALD) tool as well as a plan to introduce dry photoresists for EUV patterning in lieu of the current wet photoresists. The ALD-tool will target companies such as ADM International and Applied Materials for physical/chemical vapor deposition.

TSMC has mentioned that the 5G and HPC are the growth drivers in the long-term. This should also help the company to diversify from any slowdown in memory chip clients.

Technical Analysis

By Knox Ridley

Elliott Wave/Fibonacci Price Zones (Weekly Chart)

The above chart is my Elliott Wave count for LRCV going looking back to 2009. All Elliott Wave charts are meant to be analyzed on the logarithmic charts, which is why the trend looks more balanced. It’s measuring the percentage change in a stock.

I have LRCV ending a large degree third wave, in blue, and currently in the 4th wave down. Fourth waves typically retrace to the 23.6% to 38.6% retracement level of the entire 3rd wave. On rare occasions we see it retrace to the 50% retracement level. These levels are outlined in black to the right of the green target box.

The red, blue and black prices on the right of the chart correlate to the larger degree counts. What we want to see are confluences of price clusters. When we see this intersection, it usually marks an important region for support/resistance. These typically act as magnets to the price above and can usually be counted as great areas to either layer in or look for a bottom.

Basic Technical Analysis (Hourly Chart)

If we zoom into the hourly chart we can get a better idea of where this correction may bottom. Corrections typically unfold in 3 legs that are symmetrical (in Elliott Wave it’s marked as A,B,C). In other words, more times than not, the length of the first leg is usually the length of the last leg down.

In the chart above, this symmetrical leg down is shown by the 100% extension in black, which is to the left of the target box. This area also coincides with a number of Fibonacci price clusters, which is shown on the right of the target box.

The areas where we will focus is the yellow and green bands. The yellow band consists of the $174 – $161 region, which coincides with two Fibonacci price clusters as well as the 1/2 Gann Fan. The green band consists of $135 region which is the 100% extension of the first leg down as well as some major price clusters

Also, the B wave that we are in shows many divergences, which suggests this rally is running on fumes. We have multiple negative reversal patterns, where the RSI and MACD are making higher highs while the price is making a lower low. This is saying that a larger amount of buying pressure is needed to push the stock up to a lower price than before. The volume is also suggesting that this rally isn’t widely being bought either.

Putting it Together

The above chart combines the Fibonacci price clusters in black, on the right of the chart, and the Gann Fan angles. One thing becomes evident, the $174 region is an intersection between the Gann Angle 1/2, and the Fibonacci price cluster.

I’d look for the $174 area to act as support in the coming days/weeks. It would also be a good level to start layering in, for anyone with a long-term time frame in mind.

If the price can close above $288 and sustain above that level, then I consider that a cautious bullish scenario. I’ll consider entering with very tight stops.

I will update you when we approach one of these two scenarios.

5G: List of Stocks and Overview

Posted on February 14, 2020June 30, 2026 by io-fund

Here is a direct link to the 5G list of stocks spreadsheet: 5G List of Stocks 2020

300c2b14-9353-4a4a-bc1a-7309e2824cee_5G-List-of-Stocks-v1.pdf

5G: List of Stocks

For this analysis, please reference the 5G spreadsheet that includes a comprehensive list of the companies we are tracking across various metrics. We have also written an overview of 5G infrastructure and where we believe the most growth will occur in the 5G tech stack.

Access 5G spreadsheet here. Access 5G spreadsheet here.

As stated in our first 5G analysis, the goal is to balance optimism with a more conservative outlook. Nokia is a great example of where the 5G “hypercycle” can go wrong. The company chose a chipset that ended up being too expensive and this hurt Nokia’s profit margins. The stock is down 30% over the past year.

The following from NXP’s earnings report was sent to me by a reader: “And clearly, there is a churn going on in China right now, not only with the suppliers but also with the different standards and the different combination of carriers and their technology…it looks like it’ll still be a couple of quarters out before we’ll see strong growth in 5G deployment. We clearly see that it’s coming, just don’t see it in the near term."

NXP Semiconductors provided guidance around base stations in their recent earnings report, with the serviceable market for power stations growing only 13% CAGR over the next five years to $2.5 billion by 2024. Meanwhile, NXP issued more optimistic guidance for macro base stations and last mile solutions with a broad-based roll-out in late 2020 to early 2021 at 30-35% CAGR.

Cisco also reported declining revenue this week for fiscal Q2 2020 and stated revenue will continue to decline slightly 1.5% – 3.5% year-over-year in Q3. The CEO called 5G a “multi-year transformation” on the earnings call.

With this in mind, we are evaluating companies that solve problems unique to 5G that did not exist in the fourth generation of wireless. We are looking for companies that supply the expensive 5G chips (like Nokia referenced) and last mile connectivity (like NXP referenced). Ideally, for long term gains, the companies we evaluate will serve both consumers and business/enterprises.

I was not surprised to see the Sprint and T-Mobile merger approved. I discussed this in the prior PDF. You can expect to see the government to subsidize 5G and also become lenient with regulations in order to push 5G ahead.

The United States is behind China on 5G and this is more important than any single argument around the merger.

Top Stocks to Watch:

As of today, one of the more important takeaways from the spreadsheet is that Micron may be undervalued in regards to its impact on 5G. We will cover this stock in a full-length report as there are few competitors in data storage/DRAM.

Qualcomm ranked high across a few important metrics and that is reassuring as we also like its competitive positioning across multiple manufacturers with the Snapdragon X55 solutions. An example was found in our coverage of Inseego on hotspots and fixed wireless access, where we noted there are 33 OEMs that Qualcomm is working with on hotspots and FWAs (Inseego being only 1 of the 33). This level of diversification helps provide a safety net if one OEM stumbles or a 5G roll-out is delayed.

Skyworks and Qorvo are market favorites with well-known stories due to being Apple suppliers. These companies provide radio frequency front end (RFFE) components with an increasing bill of materials (BoM) from 3.5% during the 3G era, to 14.6% in premium 5G mmWave smartphones. Some bullish analysts expect the BoM for RFFE components to increase by as much as 30%, including Gary Mobley of Wells Fargo. Keep in mind, average sales price (ASP) of smartphones will be tested – even for 5G.

Regarding Qorvo and Skyworks, keep in mind, the bigger opportunity will be at the enterprise-level. Here’s a writeup on that with an overview of the 5G breakdown.

Large Cap Stocks:

Micron:

• Micron has nearly 150% forward projected EPS growth from $2.27 to $5.52.

• In addition, Micron ranks high across 5G stocks with forward revenue growth of 25% with healthy margins of 20%.

• Micron is guiding for weak sales and earnings over the next two quarters which has provided a lower valuation than most. However, the company is one of the only DRAM and NAND suppliers capable of serving the 5G market.

• Micron may be undervalued with a forward price to sales of 2.5 and forward EV/EBITDA of 8, which is half that of its 5G semiconductor peers.

• The company is developing a new memory chip, the 3D Xpoint, to provide both DRAM and flash.

• Micron extends beyond the consumer use case to include industrial IoT and other data and storage needs for 5G.

Here’s a snapshot of data consumption over the next few years:

Source: Cisco and Telecoms.com

Qualcomm:

• Qualcomm ranks high on forward EPS growth of 45% from $4.21 to $6.10.

• Excluding small cap stocks, the company is second to Micron in the 5G category for forward revenue growth of 23%.

• Operating margins are slightly better than Micron at 31%.

• Qualcomm has an EV/EBITDA of 14 which is double Micron’s.

• Qualcomm’s Snapdragon X55 and platform will power the majority of 5G devices across many manufacturers.

• We like Qualcomm as a diversified play across consumer and enterprise. The company works with many smartphone manufacturers and is in hotspots and fixed wireless access devices.

• Qualcomm has been trading at an important resistance zone.

• Qualcomm was covered in the 5G semis overview. Please reference this for more information.

Skyworks and Qorvo:

• Skyworks and Qorvo have EPS growth in the 20% range and revenue growth in the 10-15% range.

• The only drawback to Skyworks is that it’s mainly a consumer smartphone play with 73% of sales coming from smartphone wireless chips.

• RFFE components are expected to have a 3x higher bill of materials for premium smartphones.

• The market favors Skyworks and Qorvo as the story of being Apple suppliers is well known and easily understood.

• Qorvo was covered in the 5G semis overview. For more information, please reference this PDF.

Lam Research:

• Lam Research provides wafer fabrication equipment with the majority of its revenue coming from NAND and DRAM memory manufacturing (like what Micron does).

• Lam had a big rally in 2019 due to its strong financials.

• We covered Lam Research in the 5G semis overview.

Taiwan Semiconductor:

• TSMC is a fabrication plant for semiconductors that supplies integrated circuits to fabless semiconductor companies.

• Taiwan Semiconductor manufactures over 10,000 products for nearly 500 customers. TSMC owns

50.5% of the foundry market and is a supplier to Apple and Huawei.

• The company is currently making a lot of lists for top stocks of 2020 and is a well-known story to the market.

Small Cap 5G Stocks – Watch list:

We will be covering 5G small cap stocks throughout the next two quarters. As of today, our watch list is:

• Boingo Wireless:

We covered this early-on and have seen nearly 30% gains in the last 2-3 months. Please reference the PDF and Knox’s TA updates as the stock recently broke resistance.

• Inseego:

This stock ranks high on revenue growth and has won over many analysts following the Huawei security concerns. Please be aware, the lead investor is H2C Holdings, which is ran by Phil Falcone. For disclosure purposes, he had a high-profile bankruptcy with LightSquared and an SEC investigation for using clients' funds to pay taxes. It's important to report all information on a stock and we will be issuing an update on our TA that comes out tomorrow. The stock has climbed 13% over the past week since we covered the company in a PDF.

• Tower Semiconductor and Atomera:

These small caps compete on 5G mobile-transmit receive chips that have the ability to deliver up to ten times the data rate as 4G LTE, as well as RF SOI technology that helps to increase battery life and boost data rates. These companies are having less-than-spectacular earnings reports with flat to declining revenue but look for a breakout in 2020. Tower works with Cavendish Kinetics, which Qorvo acquired.

• F5 Networks:

F5 Networks is a company I like a lot and plan to cover with a PDF as they specialize in network functions virtualization (NFV). NFV enables network slicing and software virtualization, which we covered in our 5G tech stack report. Network slicing will allow a physical network to be separated into multiple virtual networks that can support different radio access networks. F5 Networks recently acquired Security Shape, an AI-driven cyber security company. I am especially interested in F5’s recent acquisition of NGINX, which has an open source developer following, and will help F5 provide flexibility for software developers.

• Generac Holdings:

This company had an earnings beat last week and the stock responded with a 15% increase since the report. The company provides power generators and energy products with most of the gains reflecting the power outage issues in California. The company is also well positioned to provide backup power for 5G networks.

• By my estimation, Microvision and Appian Corporation will be slower to breakout because they require successful 5G roll-outs before the products or technologies can fully mature. We will keep them on our radar for now.

o Microvision could be an acquisition target for AI-powered assistants.

o Appian is an enterprise-level low-code programming platform for automation. 5G will drive a need for enterprises to release new applications very quickly, similar to Sprint.

Marvell Technology: 2019 Analysis

Posted on November 29, 2019June 30, 2026 by io-fund

31eee308-eb10-45fc-8695-e69a5d546945_Marvell-Technology-2019-analysis.pdf

Marvell Technology: 2019 Analysis

Marvell

Marvell’s sales are flat year-over year – reflecting the status of many semiconductors with exposure to Huawei. The company reported quarterly revenue of $657 million in fiscal Q2 2019 ending in July with GAAP net loss of $57 million or -$0.09 diluted EPS. The company reports on December 3rd and has guided for $660 million in the mid-range with diluted EPS of -$0.09 and -$0.05 and non-GAAP EPS of $0.15 to $0.19 EPS.

Marvell’s revenue peaked in the quarter ending October of 2018 at $851 million, and in the quarter ending January 2019 at $744 million.

The company has guided for ongoing impact from the Huawei ban, yet stated it would be offset by a “stabilizing storage business and the earlier than expected first production shipments of our 5G solutions.” As many investors are aware, Huawei is building base stations without components made in the United States and this impacts Marvell as Huawei is the current leader in 5G infrastructure. The storage business was down 1% sequentially at $275 million due to the export restrictions on Huawei.

Samsung is increasing their orders, which helps Marvell. Nokia also uses Marvell’s chips. There was an important announcement from Microsoft in regards to using Marvell’s ThunderX in Azure for advanced programming. Lastly, Marvell has recently acquired a former-IBM ASIC chip company for $650 million (plus an additional $90 million when conditions are met), which will help its aim in 5G infrastructure as ASICs are becoming the go-to chip for customized, specific functions.

Beyond the Huawei risk, Marvell also took on quite a bit of debt in 2017 totaling $1.879 billion with a current balance of $1.685 billion in the most recent quarter. This can be problematic as the company is not currently profitable (although did achieve profitability between in 2018, 2017 and for many years prior to 2016). Cash flow from operations in the second quarter was $73 million.

In July of 2018, Marvell completed the acquisition of Cavium for $6 billion, a developer of ARM and MIPS-based SoCs. This helped broaden Marvell across the storage, networking and connectivity solutions markets and doubled the addressable market from $8 billion to $16 billion. The long term debt Marvell secured was due to this acquisition.

Marvell has a forward PE ratio of 23 and a forward price-to-sales of 5.7. Historically, the forward PE ratio is lower than years past because Marvell is forecast to have 13% growth next year. The trailing EV to EBITDA is 54, which is very high. Marvell had a EV to EBITDA of 17 during 2017 and 2018, and this doubled to 30-38 during the first half of 2019.

Although it’s good to be forward looking, to some extent, Marvell’s valuation does not leave room for the risks. This matches my opinion of nearly all semiconductors, as it’s better to buy on trade war pessimism for the long haul rather than all-time highs and trade war optimism.

In the 5G premium analysis, I had outlined key technologies for 5G infrastructure including Massive Multiple Input and Multiple Output (MIMO). MIMO sends data through multiple streams, increasing throughput, and helps to avoid lost signals. Marvell’s fusion processors assemble antennas to help multiply the capacity of the network. Marvell’s Fusion processor also helps high capacity data throughput and reduce power consumption. The comprehensive 5G platform delivers baseband, transport, switching and front-haul and MIMO at base station OEMs.

Marvell supplies components for 5G base stations and both Nokia and Samsung are customers. In turn, Samsung works with Verizon, AT&T, SK Telecom, and KT. Samsung has been able to capture business that Huawei has lost, and the level of this future growth is an important catalyst.

According to Gary Mobley of Wells Fargo, Marvell can generate $600 million in incremental revenue from 5G base station customers compared to the $2.9 billion over the past four quarters (20%) of revenue. Marvell management confirmed they expect $600 million per year from 5G revenue on the last earnings call. The speed of this growth depends on Samsung and Nokia’s market share.

Marvell stated on the most recent earnings call that 5G macro-base station penetration will grow “from about 10% this year to 38% next year, and then onto 55% in calendar year 2021.” According to the executive vice president of China Mobile, Zhengmao Li, 5G will require three times more base stations than LTE and will cost four times more than LTE. IDC states that

5G-related spending will grow at a compound annual growth rate of 118% through 2022. Therefore, there is plenty of green field.

As stated in the intro, one of the primary headwinds is the Huawei entity ban. In 2018, Huawei controlled nearly 30% of the 5G market compared to Nokia at 17% and Ericsson at 13.4%. Samsung had only 2-3% of the market.

Source: SPGlobal Note: other sources place Samsung at 6.6% and ZTE at 7.4%

Most developed countries today face a tough decision: move forward with Huawei’s radio access networks and core equipment or delay the 5G roll-out. According to Mobile UK, a partial to full restriction of Huawei could delay a full 5G launch by 18 to 24 months. This is due to many of the current 4G base systems containing Huawei’s core equipment. Non-standalone 5G systems leverage existing 4G for the roll-outs anticipated next year. In the future, new stand-alone systems will be built with new architecture and many Western countries are unlikely to choose Huawei for the rebuild. In the meantime, Europe, for instance, may be stuck with Huawei for the first roll-out.

Marvell’s 5G potential is based on the likelihood that developed countries will delay roll-outs to minimize security risks. If this does not occur, and countries deploy non-stand-alone 5G based on current 4G base systems (under the assumption the 4G systems were also a security risk), then Marvell’s growth potential relative to 5G will be delayed until stand-alone systems are built.

According to 2018 numbers, Samsung is not a lead competitor – but this could change. Newly available 2019 data tells a different story. Samsung reportedly took first position in global sales in Q1 2019 this year with 36% of sales compared to Huawei’s 28% and Nokia’s 14%. Notably, Samsung and Huawei are the only end to end providers of 5G infrastructure. Wins for Samsung and Nokia are wins for Marvell. Nokia announced 42 commercial 5G contracts in June of this year with 22 major customers such as T-Mobile, Telia Company and SoftBank.

ASICs

In May, Marvell announced plans to acquire Avera Semiconductor for $650 million in cash plus $90 million if the business does well within the next 15 months. The deal is expected to close at the end of fiscal year 2020. Avera is a player in the ASIC market, which will help diversify Marvell as 5G has begun to favor ASICs over FPGAs due to costs and power consumption. ASICs, which stands for application-specific integrated circuit, are customized to perform one very specific function repeatedly rather than general-purpose chips – hence the “application specific.” Broadcom could potentially be challenged by this acquisition. Avera will add $300 million per year to Marvell’s top line.

In contrast to ASICs, the traditional FPGA chips are high in cost and power consumption, according to critics. Marvell is attempting to offer end-to-end network infrastructure with baseband DSPs, Arm multi-core SoCs (system on chips), purposebuilt hardware accelerators, Ethernet connectivity engines and system-level security solutions. Although Marvell aims to offer specific-use ASICs and semi-custom ASICs, the 5G platform that Marvell offers will be adaptable for many use cases to expand on any ASIC limitations.

The primary SoC competitor is Broadcom. NXP Semiconductors and Qualcomm also compete with Marvell. Xilinx is a competitor on FPGAs.

Source: SDX Central

Cloud Infrastructure

It’s important to note that Marvell is also a supplier for cloud infrastructure and data center storage solutions. On November 12th, 2019, Marvell announced that Microsoft Azure is deploying production-level servers with Marvell’s Thunder X2 Armbased processors.

Thunder X2 is the second generation of the Armv8-based server and is based on the computational performance of an Arm server along with balanced IO connectivity, memory bandwidth and capacity.

Following this announcement, Nvidia announced a collaboration with Marvell’s ThunderX to port its CUDA-X AI and high performance computing libraries and tools to the platform. This will help Marvell secure an entry into the AI and ML market through the Arm architecture. ThunderX has over 100 partners across commercial, open source and industry standard engagements. The Nvidia partnership will open up more than 600 HPC applications and AI frameworks.

If you’d like some history on ThunderX during the then-pending Cavium acquisition, this article on Forbes is a good resource.

Conclusion:

Marvell is certainly a lesser known name at $17 billion market cap compared to the $100 billion market cap competitors. Typically, investors overestimate the ability of the larger competitors and don’t give enough attention to the fast-moving innovators. The reason I wrote this analysis is because Marvell is doing all of the right things across its product line to overcome the current challenges.

Huawei is overshadowing their product strength and with some luck, this can subside and the Fusion processor can find real growth again. On one hand, you have the very real possibility that Samsung picks up market share and Nokia maintains market share, especially among Western regions.

ASICs are also a strategic play as they are becoming favored over FPGAs. Lastly, there is the ThunderX platform that delivers acceleration in the cloud, which will need time to be adopted, yet is an area of product-market fit that I am tracking.

At the right price, Marvell is worth the risk as any turn in one of these events can make an impact on the company’s fundamentals. Knox will follow up with some technical analysis shortly.

Have a great Thanksgiving!

Qualcomm Technical Analysis

Posted on November 24, 2019June 30, 2026 by io-fund

Qualcomm has not reached its $100 stock price high since the late 90s. Since then, Qualcomm’s price action has been in a series of multi-year ranges, overlapping structures, and powerful uptrends that get sharply interrupted, which makes charting its structure not as straight forward as other stocks.

However, with 30 years of price action, I believe we will see a pullback, followed with a renewed uptrend that should take QCOM to all-time highs for the first time in 20 years.

Elliott Wave Count – Game Plan

The above chart is a snapshot of Qualcomm’s price action trading from 2015 until now. We are currently in a larger degree, primary wave-3, which is highlighted in blue. This wave will take years to play out, and will see a number of corrections along the way.

Remember, each wave is comprised of its own internal waves and is part of a larger wave. So, if we go one degree lower in time, what’s evident is that the primary wave-3 in blue is unfolding in a leading diagonal pattern. We are currently on the 3rd wave of 5 within this leading diagonal, which is highlighted in green. The evidence supports that we should expect a B wave correction soon.

Recently, the price of Qualcomm was met with a very tight cluster of Fibonacci levels, which are derived from multiple timeframes, and instantly reversed. This would put us in the beginning stages of the B-wave retrace, and the likely targets are in the green box. These price levels are comprised of retrace levels that will act as likely support and reversals in the coming correction.

Based on how dislocated semiconductor valuations got from their price, I will be targeting the lower end of the green box, which has another confluence of Fibonacci price clusters.

Internals and Trendlines Support Correction

If we look at the trendlines and internals of Qualcomm, it supports the correction scenario outlined above. First off, the RSI is showing negative divergence – the RSI is making lower highs while the price of QCOM makes higher highs.

This is always a caution sign and signals a drawdown of some extent, but it’s also worth noting that QCOM is also in overbought levels, further supporting the need for a momentum reset.

Next, it’s worth noting the 2 uptrends, which are highlighted with the blue dashed lines. Below each uptrend, the MACD moves along its own trendline. When the MACD is trending along with the price, it’s the sign of a healthy uptrend.

The MACD uptrend can also act as a warning of a large drawdown as well. Notice when the MACD and the price both broke their trends and how much downside that followed. I’m not expecting a drawdown of the magnitude we saw in late 2018; but, I am expecting a healthy correction.

The MACD also rolled over and is heading back towards the trend line. Once these trendlines break, the green target box will be in play, and I will be looking to make a position. For anyone that does not want to time their entries and wants to buy today, a suggested stop would be at $61.

However, I believe we will see a pullback into the region between $80 on the shallow end – and $60 on the more severe end. There is a large number of price clusters around the mid to low $60, and I would be a buyer around this price region.

5G Premium Analysis: Semis Overview

Posted on November 22, 2019June 30, 2026 by io-fund

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5G Premium Analysis: Semis Overview

Introduction:

Semiconductors are going through an important divergence between earnings and stock price. Earnings are flat to negative YoY and QoQ, and yet stock prices are reaching 52-week highs. Although a rebound was forecast for 2020, semiconductors have blown past price targets, leaving little left to be desired in their valuation.

This is not a good time to initiate semiconductor positions purely based on 5G. My preference is to wait until forward earnings/guidance and valuations are more aligned, especially with the trade war risk, capex costs for cloud and 5G expansions that will affect some companies, and the slower recovery than current valuations suggest. For instance, only 12 of 30 semiconductor companies plan to return to growth next year. The majority are expected to report below 10% growth next year and will remain below 2017 sales levels.

Regarding semiconductors for 5G, it will be important to differentiate between consumer use cases and business use cases. The latter is 5G’s true growth opportunity yet is much further out from deploying. To illustrate, Bernstein Research, a renown sell-side analyst firm, believes 5G will be more of a replacement cycle for 4G, so the unit opportunity will not be as significant as previous generations in the consumer category.

Another challenge, which I will cover in a separate analysis, is the end-to-end 5G infrastructure. Gartner predicts that half of communication service providers (CSPs) will fail to monetize back-end infrastructure due to systems not fully meeting 5G use case requirements. A complete infrastructure will be built by the 2025-to-2030 time frame, with 5G radio deploying first, then core slicing and then edge computing.

Regarding the consumer 5G opportunity, Qualcomm predicts 200 million 5G smartphones to be sold next year and 450 million 5G smartphones in 2021. Currently, there are 1.5 billion smartphones shipped annually. The semiconductors below primarily benefit from consumer 5G.

The global 5G infrastructure market is currently valued at $371 million in 2017 and is projected to reach $58 billion by 2025, growing at a CAGR of 95.8% from 2018 to 2025. We will cover infrastructure and business/industrial 5G use cases in a future analysis.

5G Semiconductor Overview

Qualcomm is an interesting opportunity because they are dominating consumer 5G across many geographies and smartphone manufacturers while positioning themselves for business use cases in the future. This is unique compared to opportunities where you are confined to either consumer or business. I cover Qualcomm in length below.

Lam Research is being aggressive with buybacks with one analyst forecasting the company will return about $12 billion to shareholders from 2018-2023. This is about 30% of Lam’s market cap. The company stands to gain from the upgraded memory that will be required from 5G.

This analysis also covers Qorvo, a company that exceeded analyst expectations recently. The company has quite a bit of exposure to Huawei and China, where 5G is ramping up quickly yet carries very high risk. However, 35% of revenue is derived from Apple and may help to offset any trade war issues with 5G in the United States.

Broadcom had a peak year in 2018 with $20.8 billion in revenue and is expected to reach $16.97 in fiscal year

2019. According to current guidance, Broadcom will report $19.52 in fiscal year 2020 and $22.36 in fiscal year 2021. Like Qualcomm, Broadcom should make up to 50% more on chips from 5G than 4G (see Qualcomm for stats).

Qualcomm

Qualcomm is a company that has been working towards the 5G rollout more aggressively than almost any other company on the market today. Qualcomm was a first mover in 5G technologies, such as mobile mmWave, flexible frameworks, scalable OFDM numerology and reciprocity-based massive MIMO.

Basically, Qualcomm is well diversified and singularly focused on 5G. This market lead was demonstrated when Intel exited the 5G smartphone modem business last April and sold its offerings to Apple for $1 billion. This was around the time when Apple acquiesced and struck a deal with Qualcomm, their long-time nemesis. This supports Qualcomm’s assertion they have the best chip on the market as there had been rumors Apple was designing their own chip or would go with MediaTek.

Qualcomm’s market lead has also allowed the number one chip designer to be the provider of 5G modem chips for Xiaomi, LG Electronics and ZTE – plus Samsung although not exclusively. Qualcomm estimates their serviceable market to be $65 billion now and $100 billion in three years (always consider the source).

On that note, Qualcomm can charge more for 5G chips. Analysts estimate 5G smartphones will offer Qualcomm the opportunity to sell 50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons).

As stated in the intro, Bernstein Research, a renown sell-side analyst firm, believes 5G will be more of a replacement cycle for 4G, so the unit opportunity will not be as significant as previous generations. This is because 4G delivered mobile broadband with smartphones being the primary benefactor. The next generation will deliver the wireless edge with 5G New Radio (NR), with the main benefactor being new platforms of interconnected devices and M2M communication.

It helps that Qualcomm is diversified. The number of 5G-capable devices will rise from fewer than 5 million in 2019 to more than 50 million in 2020 due to phones, routers and hot spots.

Qualcomm is positioned for both consumer and business use cases through over-arching infrastructure. The global 5G infrastructure market was valued at $371 million in 2017 and is projected to reach $58 billion by 2025, growing at a CAGR of 95.8% from 2018 to 2025.

Here is the list of the suite of 5G related technologies offered by Qualcomm:

• Private networks

• 5G internet of things (IoT)

• 5G broadcast

• mmWave evolution and also Sub-6Hz spectrum

• XR Devices such as Augmented Reality and Virtual Reality

• Shared, unlicensed spectrum

• 5G NR C-V2X smart transportation (autonomous vehicles)

• Industrial IoT with eURLLC

Holistically speaking, 5G will enable fully-distributed artificial intelligence rather than cloud-centric AI. This goes beyond lower latency and customized/local value. Soon, AI will occur on-device for internal optimizations. This will create:

• On-premise control for factories and manufacturing robotics and machinery

• On-device intelligence assisted by the cloud; critical for autonomous vehicles to operate

• Distributed processing for XR devices.

• Cloud computing, storage and instant access

• Low-latency gaming

• Better AI voice assistant and AI user interfaces

For enterprises, Qualcomm offers 5G New Radio (NR) mmWave private networks. The most likely industry to adopt private networks is the industrial sector. Release 16 for 5G will occur in the H1 of 2020 and private networks will begin to scale in 2021. Private LTE provides a clear and committed upgrade path to 5G.

The term “private networks” refers to networks with radio core, and transmission resources dedicated to the enterprise. Most importantly, the private network is under the control of the enterprise.

Less industrial businesses are unlikely to upgrade to 5G until there is a clear cost-benefit ratio. There are also other options which leverage LTE and WiFi that are less expensive than 5G mmWave technology.

Cellular vehicle-to-everything (C-V2X) will be included in future 5G releases for autonomous driving. The enhanced network communication proposes vehicle-to-vehicle, and vehicle-to-infrastructure communication. For instance, not only will the vehicle you’re driving communicate with the vehicles around you to assist with braking and lane changes, but the vehicle will also communicate with street light infrastructure. This is a future technology and not a serious catalyst at this time.

Fundamentals

Qualcomm’s fundamentals reflect many of the risks involved with the stock. The first is the ongoing lawsuits Qualcomm is involved with, and the second is licensing fees, which Huawei is currently withholding. To put it plainly, most of Qualcomm’s partners do not like Qualcomm.

The current semiconductor rally would cause one to believe we have found a bottom for semiconductors. By my estimation, this is not true for Qualcomm. Next quarter, the company is forecasting $4.8 billion in sales and $0.85 EPS, which is relatively flat. Combined with the current stretched valuation for semiconductors, there should be a lower entry.

With that said, expected sales increase for Qualcomm for 2020 is 17%. For 2021, a sales increase of 21% is expected. This is substantially better than the previous three years, which posted negative sales growth.

Risks:

Qualcomm’s Snapdragon X50 5G modem is considered the industry’s most advanced offering. However, Huawei openly challenges this assessment. Last March, the CEO of Huawei stated that the Balong 5000 modem can download at double the speed of the Qualcomm X50.

Whether this is true is irrelevant. Huawei is essentially stating it has no plans of using Qualcomm, and China overall is likely to be less dependent on foreign chipmakers in the 5G era.

As of now, Huawei builds up to 60% of their Kirin mobile processors. Bernstein Research has stated they expect HiSilicon Technology to be Asia’s biggest chip designer by revenue in 2019. HiSilicon Technology has tripled its revenue from $2.4 billion in 2014 to $7.6 billion in 2018. MediaTek supplies Oppo, Vivo and Xiaomi. Samsung has developed its own 5G modem chip for high-end devices in markets, such as South Korea.

Therefore, it’s very possible that whatever United States mobile technologies gain from 5G will be offset in what these companies lose from China’s nationalist stance. Also, Qualcomm enjoyed 5G hegemony in fiscal 2019 with 230 5G design wins across 40 OEMs, and this will be challenged in 2020 and beyond.

Qorvo

Qorvo is a provider of radio frequency chips for mobile products (MP), and infrastructure and defense products (IDP). The mobile product is a radio frequency solution that performs various functions in the cellular radio front end section of smartphones and other cellular devices. The IDP segment supports global applications, including high-speed network connectivity to the cloud, data center communications, and internet connectivity.

Qorvo has beat quarterly estimates for the past four quarters. The company recently experienced a surge in stock price due to reporting Non-GAAP EPS of $1.52 versus $1.30 and also beat the revenue consensus by 7%. On a GAAP basis, Qorvo reported revenue of $807 million with gross margins of 40% and diluted EPS of $0.70. The company also announced $1 billion in buybacks.

Notably, despite beating earnings, the company has had relatively flat revenue growth of 4% in 2019 following negative growth in 2018, and continues to forecast for minimal growth of 2.3% growth in 2020. Compare this to 2015-2016, when Qorvo saw about 50% revenue growth YoY.

Earnings are expected to grow at 56.9% annual growth through 2022, which exceeds the industry average of 19.6% and the market’s 14%.

Qorvo is an Apple supplier with 35% of revenue derived from the iPhone. The Huawei ban is an important consideration for Qorvo. There continues to be extensions on the entity list that bans US suppliers from selling components to Huawei. The extensions on the ban have allowed chip companies to recover from May lows.

As of now, another reprieve will be needed when the extension expires in December. According to author KwanChen Ma on Seeking Alpha, a full Huawei ban knocks off 13% of Qorvo’s revenue.

Notably, according to Mayfield Recorder, institutions have taken gains on Qorvo recently with outflow exceeding inflow for the first time since Q2 2017.

Lam Research

Lam Research provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies. Front-end wafer processing solutions from Lam Research help to create chips and applications for nearly every edge device on the market. Wafer processing create transistors, capacitors and wiring for semiconductors.

Lam Research has a potential growth opportunity due to the increase in demand for memory from artificial intelligence, IoT devices, and 5G mobile communication. Down the line, memory will also be needed for autonomous vehicles. Memory manufacturers need wafer fabrication equipment.

Despite negative year-over-year growth and only 5% growth forecast for 2020, Lam Research has rallied. The stock is trading 116% higher from December lows. One catalyst is Lam’s buyback program. The company is returning 50% of its free cash flow to shareholders through dividends and buybacks with plans of returning a total of $12 billion to shareholders by 2023. This will lead to a 11.5% decline in shares.

One argument for Lam Research is that the company is protected from supply and demand in memory as memory manufacturers will continue to buy from Lam even during a low point in the cycle. This was proven during 2015 when Lam did not feel the effects of the memory trough. Secondly, Lam spans across Micron, Samsung and Intel, and therefore, is more diversified.

As recent as last July, Lam Research’s profits were nearly 50% less than the year-ago quarter at $541.8 million compared to $1.02 billion a year ago. Sales were $2.36 billion compared to $3.13 billion in the year-ago quarter. In current quarter, Lam reported -8% year-over-year sales. As stated, the company is forecasting only 5% growth next year.

Although Lam is situated nicely for memory growth, the numbers are not reflective of the opportunity. It’s likely we see a lower entry for this stock.

Broadcom

Broadcom is one of the rare semiconductor companies that is expected to post increasing revenue and EPS this year. Next year, the company is expected to grow 4-5% across the top line and bottom line. Historically, Broadcom has been on a nice trajectory compared to many semiconductor peers, with 50%+ increases in annual revenue and some years posting triple digits (2015-2016). This growth has clearly slowed down yet earnings are forecast to grow from $16.97 in fiscal year 2019 to $19.52 in fiscal year 2020 and $22.36 in fiscal year 2021.

The only drawback to Broadcom is the 5G push will be consumer oriented only. The company sells a variety of chips that enable wireless capabilities in smartphones, such as Wi-Fi, Bluetooth, and cellular. Apple makes up over 60% of Broadcom’s overall wireless revenue. Similar to Qualcomm, Broadcom will make more from 5G chips than from previous generations.