Image Source: Flickr user Yuri Samoilov.
Many investors know about the latest smartphone, laptop, or tablet computer, and the big-name companies that market them. However, many in-the-know investors look at adjacent investing opportunities among suppliers and third-party manufacturers. In many cases, these unheralded, less-covered companies are better investments than their well-known business partners.
Perhaps the most famous case of this investment thesis was Microsoft and Intel (INTC +1.34%) in the 1990s -- a business relationship so strong, many referred to the two as the "Wintel Monopoly." A $10,000 investment in the former would have been worth $356,000 by the end of the decade. That same investment in Intel, however, would have been worth nearly $1 million during the same time frame.
With that in mind, we asked three of our technology specialists for semiconductor companies with potential for strong stock performance.
Jamal Carnette, Synaptics (SYNA +0.14%): Synaptics is an interesting company with a number of positive catalysts in the offing. The biggest opportunity relates to its ClearForce technology. If you've been paying attention to the newest iPhone, you're probably well aware that the key differentiating technology is its 3D Touch -- the ability for the phone to discern between light taps and deep presses.
High-end Android vendors need to include this technology in order to keep up, and Synaptics' ClearPad 3700 force-sensing controller gives these companies an out-of-the-box solution. Look for this to become a large part of Synaptics business going forward. And it's not only Android; the company is looking to more effectively monetize its Renesas acquisition to get its silicon back into the wildly successful iPhone.
Currently, this stock is trading at a forward P/E ratio of 12 times earnings, and a PEG ratio of one -- it's a relatively inexpensive stock. And I'm not the only person with this thought; in September, the company rocketed up 27% when it turned down a $110 offer from a Chinese investment group. If the company executes on the above-mentioned opportunities, that figure may be laughably low.
Tim Brugger, Intel: Intel's down nearly 10% year to date. It's clear that investors haven't quite bought into Intel CEO Brian Krzanich's plans to transform the once PC-reliant semiconductor king into a cloud and Internet of Things (IoT) market leader. This is great news for value investors, particularly those who appreciate one of the tech industry's top dividend yields of nearly 3%.
Last quarter was a microcosm of Intel's past year. A slowing PC market hit Intel's client-computing group hard. It declined 7% compared to Q3 2014 in what has become a recurring theme. However, improving results in its cloud-based data center group and IoT-related sales continue to make up for declines in client computing. Last quarter, data center sales jumped 12%, to $4.1 billion.
Intel's improving cloud results combined with its 10% year-over-year jump in IoT revenue now make up nearly a third of total sales, and it's in these key areas that Intel's fortunes are tied. Most estimates suggest that the cloud will become a more than $100 billion market by this time next year, and that pales in comparison to expectations for IoT.
In other words, Intel has bet its future on successfully transitioning to two of the fastest-growing markets around. Yes, it was late to the cloud and IoT parties, and shareholders have paid the price for Intel's delay; but for long-term investors, Intel's slow transition is exactly why its stock remains such a sound, undervalued growth-and-income opportunity.
Andrew Tonner, ARM Holdings PLC (ARMH +0.00%): Although not necessarily "cheap" in the traditional sense, British semiconductor designer ARM Holdings deserves its 46x earnings multiple because of its continued compelling long-term growth profile.
The company rose to prominence with the onset of mobile, adroitly exploiting chip-leader Intel's failure to emphasize power efficiency and performance as equally important elements for today's smartphones. Intel's historically bad oversight has allowed ARM Holdings, which licenses its designs to chipmakers to grow its revenue at an average annual rate of 29% from 2010 to 2014. The company has said it expects its licensing revenue growth to slow to between 5% and 10% annually through 2020, although operating leverage in its relatively low-cost business model should help profit and EPS growth expand even faster.
Fortunately for ARM Holdings shareholders, its technology leadership in mobile has proven resilient in light of Intel finally mounting a meaningful assault on ARM's mobile market share. Intel has thrown massive amounts of resources toward its Atom mobile processor lineup in recent years, but has little to show for it, and future products show few signs of promise before 2018.
The company is also diving full on into the Internet of Things, another chip market that will lean heavily on power efficiency, which has long been ARM's specialty. While its backward-looking valuation may seem unappealing to more traditional value investors, rest assured that ARM Holdings' future growth opportunities make its current valuation worth the risk.
