News > Technology
Go go gadget phone!
Companies that make chips for hot consumer electronics products like camera phones should thrive.
April 7, 2004: 2:04 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Wall Street may be starting to worry about whether big businesses are going to substantially increase their spending on tech.

But there is no such fear when it comes to consumers. Electronics retailers Best Buy and Circuit City both reported stellar results last week as camera phones, MP3 players and plasma TVs flew off the shelves.

And this is good news for semiconductor companies that make chips used in these popular devices.

For that reason, some analysts think that shares of companies like OmniVision Technologies (OVTI: Research, Estimates), Genesis Microchip (GNSS: Research, Estimates) and Trident Microsystems (TRID: Research, Estimates) are better bets than chip giants like Intel and Advanced Micro Devices, which have more exposure to corporate tech spending cycles.

Don't sell on the Nokia news

OmniVision Technologies was mentioned as a favorite of several analysts. The company is the leading manufacturer of image-sensing chips for camera phones.

The stock took a slight hit on Tuesday after cell phone market share leader Nokia warned that sales for the first quarter would be lower than expected, but the selling appears to have been an overreaction, according to Casey Ryan, an analyst for Wells Fargo.

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First, Nokia is not an OmniVision customer. More important, Nokia indicated that overall demand for cell phones remains strong. Competitors simply gained market share.

As a result, Ryan thinks Nokia will step up efforts in developing advanced camera phones, leading to stronger growth in the camera phone segment -- and the chips that go in them.

In addition to OmniVision, Ryan says Agilent Technologies (A: Research, Estimates), ESS Technologies (ESST: Research, Estimates) and Zoran (ZRAN: Research, Estimates), which also make imaging chips, should see a pickup in demand.

Brian Alger, an analyst with Pacific Growth Equities, agrees that OmniVision and other imaging chip manufacturers are good bets. "All we're seeing now in the market are multimedia phones. It's clear that this isn't a fad. The cell phone is becoming a different device," he said.

Alger adds that companies like nVidia (NVDA: Research, Estimates) and ATI Technologies (ATYT: Research, Estimates), which make graphic chips used in popular video game consoles should also benefit as phones start to include more advanced games in them.

Boob tube is big business

Besides camera phones, high-tech plasma and liquid crystal display (LCD) televisions are expected to remain hot sellers throughout the year. Part of that will be fueled by price cuts from TV manufacturers such as Sony, Sharp and Gateway.

The Federal Communications Commission is also helping. The regulatory agency mandated that all television makers must include tuners that transmit digital signals in new TVs starting this year.

"The transition to digital television is a longer-term trend that will benefit chip suppliers," said Michael Bertz, an analyst with Morgan Keegan.

Bertz said that Genesis Microchip and Trident Microsystems should be the biggest winners in this market. He adds that Zoran, which entered the high-definition TV segment through last year's acquisition of Oak Technology, will also benefit.

And Alger said Pixelworks (PXLW: Research, Estimates) is another company making chips for televisions that should do well.

Are the stocks still a buy?

For investors, there is no question that valuation is a concern. Many of these stocks have already enjoyed solid runs and have rich P/Es. Shares of Trident are up 70.5 percent in the past six months and trade at 65 times calendar 2004 earnings estimates. Pixelworks has surged 60 percent this year and the stock has a P/E of 43.

But Alger said that most chip stocks with consumer electronics exposure still look attractive since their earnings estimates have been rising substantially and will probably continue to do so.

Three months ago, analysts were predicting that OmniVision would earn 73 cents a share this fiscal year and 97 cents a share next year, for example. Now, the consensus estimates are for 91 cents this year and $1.42 a share next year. The stock trades at 31 times this year's earnings estimates.

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"In an up cycle, it is very difficult to forecast the velocity of the earnings growth. Therefore, Wall Street prices in a premium for these stocks because it's human nature to be conservative," Alger said.

Bertz adds that some of the stocks are actually trading at fair multiples, especially when you consider their growth rates.

Zoran has a P/E of 27 and its earnings are expected to increase 25 percent a year for the next few years. Genesis is trading at 28 times estimates for its next fiscal year, which ends in April 2005, and profits are expected to grow at a 20 percent clip annually.

Analysts quoted in this story do not own shares of the companies they follow and their firms have no investment banking relationships with them.  Top of page

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