Which Stock Is the Best Buy in Semiconductors?

Heading in to 2013, the semiconductor market is likely to continue to be a critical area in the technology sector. Directly tied to mobile computing, smartphones, and tablets, the major players are competing for consumer dollars in one of the most significant growth markets in the economy. According to a recent Gartner report, "Worldwide semiconductor revenue is projected to total $311 billion in 2013, a 4.5% increase from 2012 revenue." While this represents solid growth, it is still a decrease from recent estimates by the firm: Because of "economic headwinds and an inventory correction, the fourth quarter projections have been revised down from the previous quarter's forecast of $330 billion."

The contenders
Given the dollars that are at stake, the competition is likely to be fierce. What follows is a brief review of the top four players and the relative strengths of each.

Qualcomm (NASDAQ: QCOM  ) : At the center of Qualcomm's success this year is the company's dominance in the 4G LTE space. A recent report by Strategy Analytics places Qualcomm's market share at 48.1% among application processors. When you consider that the industry as a whole registered 69% year-over-year growth, the figure becomes even more impressive. At the company's November earnings release, it reported increases of 20% and 18% in net income and revenues, respectively. Adjusted earnings beat expectations, coming in above the consensus estimate of $0.82 at $0.89. It is hard not to argue that as of 2012, Qualcomm is the "new chip king."

NVIDIA (NASDAQ: NVDA  ) : Just as Qualcomm has dominated the smartphone market, NVIDIA has made major inroads into the tablet market: As I reported in an earlier Fool article: "Research firm IDC recently raised its projection for growth in this market in 2012 and beyond. The firm now expects the tablet market to grow to 122.3 million this year [and] 172.4 million in 2013, and for there to be global shipments of 282.7 million units shipped by 2016." IDC also sees further increases to Google (NASDAQ: GOOGL  ) Android market share in the tablet segment, up from 39.7% in 2011 to 42.7% in 2012. This growth is favorable for NVIDIA, which makes the favored processor for many Android tablets, particularly the popular Google Nexus 7. Overall, while NVIDIA lacks the appeal of Qualcomm, it still appears to be a solid option.

ARM Holdings (NASDAQ: ARMH  ) : Perhaps ARM's primary claim to fame is its relationship with Apple (NASDAQ: AAPL  ) for the chips that power many of the company's most popular devices, including iPhones and iPads. In a recent report from Gartner, principal analyst Peter Middleton said: "The 'Apple effect' is expected to remain pronounced in 2013, helping drive strong NAND and application-specific integrated circuit (ASIC) revenue growth of 17.2% and 9.4%, respectively. Gartner counts the A4, A5, and A6 application processors from Apple as ASICs, because these are custom processors, designed and solely used by Apple." The takeaway from these statistics is that despite slower-than-expected growth in the segment, ARM is still well positioned for 2013. Ultimately, while ARM looks attractive at current levels, Qualcomm is still the most appealing of the three thus far.

Intel (NASDAQ: INTC  ) : Intel stands apart from the others in that it is poised for success under a different set of circumstances. There is little question that at current levels, the stock represents a solid value. The company has diversified exposure to the PC, mobile, and server markets, allowing it to stand apart from its competitors. On the PC front, in 2012, PC processors will account for $31 billion of technology spending, roughly five times the size of the mobile processor market. Even with the continuing importance of PCs, Intel is not resting. Intel is expected to release its own LTE chip  in the early part of 2013, and DigiTimes recently reported that the company plans to roll out a completely revamped smartphone platform at the Mobile World Congress in late February. Finally, the server market, in which Intel has always been an important player, represents a $10 billion-per-year  market segment. Intel has both reasonable growth potential and a compelling value proposition.

And the winner is ...
While all four of the companies look attractive on an outright basis, Qualcomm is the most appealing choice for growth. Smartphones are showing no signs of surrendering the breakneck growth rates they have enjoyed, placing the company in a great position. The company has run away with impressive market share and equally shows no signs of slowing. It rightly deserves the title "Chip King" and should be a part of your portfolio going into 2013.

On the value side, few companies in any segment are as attractive as Intel. In an industry that has struggled with capacity issues all year, the company's expertise in manufacturing should give it an advantage once it gets in the fight. With a P/E below 9, this is a value play in semis that should be in your portfolio with Qualcomm.

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates for an entire year. Click here now to learn more.


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