Investing in the 21st Century
Sorting out Semiconductors
July 18, 2006
Page 2 of 3
Believe it or not, the small and highly popular Apple iPod’s have pieces of silicon inside giving them functionality. PortalPlayer (PLAY) was once a premier supplier of chips for the music player, but when PortalPlayer ramped up the prices on its chips with excessive features, Apple opted to go elsewhere with its business. The impact on PortalPlayer stock has been severe – it has lost almost 70% of its value in 2006 alone.
The current major makers of chips for the video iPod are Broadcom (BRCM) and Marvell Technology (MRVL). Both companies boast impressive products in the entertainment and wireless arenas. Marvell makes a chip that assists with the iPod hard disk controller. Marvell also purchased the wireless chip and communications unit of Intel for $600 million two weeks ago. Marvell will now also play a role in another popular gadget, the Palm (PALM) Treo smartphone.
Marvell stock has fallen 35% for 2006 as valuation concerns impacted the stock. Additionally, Marvell shares took a hit after the announcing that the SEC was launching an informal probe into its employee stock option granting practices. The issue of illegally backdating stock options to maximize payments to executives has surfaced recently, implicating over 50 technology companies so far.
Another casualty of stock option backdating is Broadcom, which announced last week that it would restate past earnings with $750 million of added expenses from improper grants. Broadcom’s chip products include uses in HDTV’s, DSL modems, and personal video recording devices. In the iPod, it provides a video decoder chip to support video playback. Broadcom also has a significant presence in the wireless arena, even designing a wireless card for the 802.11n standard, a technology capable of up to 540 megabits of data transfer per second, with a more typical data rate of 200. This offers significant performance improvement to the current 802.11g standard, which tops out at 54 Mbps. Shares of Broadcom have suffered the same downtrend as Marvell, giving back all its gains in the past 52 weeks for no net change.
The video iPod also includes an SDRAM chip produced by Samsung. Samsung is based in South Korea, and also has a presence in the iPod Nano version. Cypress Semiconductor (CY) assists in the performance of the click-wheel, by converting finger movements into digital signals. Wolfson Microelectronics also plays a role with its audio codec.
These supplies represent only a portion of chips used in the device; the iPod's integrate many more components from various suppliers. Analysts estimate that the materials used in the iPod cost Apple about $151 per $299 unit. Seventeen percent of Apple's total cost involves chips.
Smaller chipmaker Sigmatel (SGTL) provides chips for the iPod shuffle. Sigmatel is known for being a “fabless” company, which means that it outsources the manufacturing of silicon wafers. Hundreds of companies have adopted this popular practice, allowing them to focus their time on design rather than production. The manufacturing is usually outsourced to cheaper factories in Asia. After starting out the year at $14, Sigmatel has fallen below $4. Concerns about softening demand for semiconductors have impacted the stock.
In the world of computer graphics, nVidia (NVDA) is considered the market leader, while ATI Technology (ATYT) also has a solid foothold. nVidia is known for its graphics processing units (GPU’s) used in computers to enhance the visual experience. Both companies produce technologies to support game consoles and mobile phones. ATI stock has had little movement over the past year while nVidia has experienced a swift run and fall. A low P/E on nVidia and its consistent performance gives it a promising outlook.