Visualising the IoT opportunity in just two slides.

During their investor day 2017, Analog Devices showed two slides that brilliantly captures the IoT opportunity for semiconductor companies:

The first illustrates the number of devices per person from many people per device to many devices per person. A 4th wave should be added to illustrate that IoT really does not require a person as it is more about Machine to machine communication.


Although electronics become more advance and cheaper at the same time, revenue is driven by the exponential increase in number of intelligent units that needs semiconductors.



You can see all the slides from Analog Devices Investor day here:


What will make Qualcomm worth 103B$?

With an offer of 70$ per share totalling 103B$, Broadcom has initiated a discussion of the current value of Qualcomm. The share price of Qualcomm prior to the bid was floating around 53$ suggesting a market value of 79B$. The Broadcom bid has increased the value of Qualcomm’s share price in the vicinity of 64$ (95B$) suggesting the investor view is mixed about the probability of a merger.

The immediate response from Qualcomm to the offer of 70$ was that it was undervaluing the corporation. So who is right? How do you calculate the value of a corporation?

Calculating what a company is worth requires a view of the current financial state of the company and assumptions about the company’s future.


Shareholder Value Analysis (SVA)

An effective way of calculating corporate value without being a CFO is to create an SVA analysis. An SVA calculates the value based on a company’s ability to generate future cash flows. Because of the time value of money, the cash flows are discounted with the Weighted Average Cost of Capital (WACC). Don’t worry – you don’t need to understand WACC or discounting to read the rest of the article. All you need to know is that WACC for the semiconductor industry is approx 9.2% at the moment and that it can change over time. It can be seen as the minimum acceptable rate of return investors in semiconductor companies will accept.

There are 7 value drivers that impact the future cash flows of a company in which Revenue growth and operating margins are most important for valuation of a fabless semiconductor company.

An assumption that satisfies the Broadcom bid can be seen below:

You don’t need to understand all of the technicalities of the calculation other than the Yellow box represent the value in m$ and in share price, based on the assumptions above. The sensitivity analysis lower left shows that the value of Qualcomm is impacted most by Operating Margin and Sales Growth Rate.

Operating Margin: In this example,  25% is chosen. Since the beginning of 2016, Qualcomm’s OPM has varied between 5.6% and 41%. The most recent was 5.6% showing Qualcomm’s dependence on license payments from their customers.

Sales Growth Rate: The latest quarter Qualcomm experienced -4% growth compared to the same quarter last year. This was again impacted by low license payments from customers based on legal disputes. In the example, 7.3% is chosen to satisfy the 70$ bid.

In other words – Qualcomm is worth 70$ if it can maintain an OPM of 25% and a Sales growth rate of 7.3%.

Value at 25% OPM

Real business nerds (yes we are) would immediately try and find out what different Sales Growth Rates would do to the valuation of the Qualcomm:

The chart shows (Assuming 25% OPM) that the market estimated that Qualcomm was able to grow sales 2.5% per year. The Broadcom offer would balance if Qualcomm was able to achieve 7.3% sales growth per year.

It is also possible to investigate Operating Margins impact on Qualcomm valuation. If the assumption is made that Qualcomm will be able to achieve an average sales growth rate of 7.3% the impact of various Operating Profit Margins can be evaluated.

The prebid valuation shows it could be achieved at 18.5% OPM and that the current Broadcom offer balances at 25% operating margin.

It is important to understand that for Semiconductor companies with most of the value tied up in intangible assets, a discussion about value is a discussion about expectations about the future. When Qualcomm states that the Broadcom undervalues the company it is really a discussion about two different views about the future.


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Divisional Semiconductor Growth, Q3-17

Most of the Q3-17 results of semiconductor companies have been published and it is time to take a look at the divisional growth of the top Semiconductor companies. The results already show that semiconductor revenue growth is dominated by price increases in the memory market favouring companies like Hynix, Micron and Samsung.



The Hynix DRAM and Micron Computing divisions have experienced extraordinary growth and reveal both the product and the market hotspot. The data centre market is on fire and has an insatiable hunger for memory. In particular, the DRAM market is heated – Hynix experienced twice the DRAM growth than NAND. The skew between DRAM and NAND is a result of the last few years investment strategies of prioritising NAND over DRAM. The memory companies have all been surprised by the increase in DRAM demand – they expected the world to convert to flash.




A shift in the Semiconductor Market

Nvidia’s Tegra division has the highest growth of non-memory divisions together with AMD’s computing and graphics division. Also, Nvidia’s GPU division is not far behind. This is by far the largest division of the three and growth is driven by GPU sales to the Datacenter. The Datacenter revenue is up by 114%. This result is revealing that the DRAM hunger is created by the growing need for Artificial Intelligence in the Cloud Data Centre.



Removing the large memory companies from the list gives a deeper look at the divisional growth:

  • The good divisional results from On Semi and Renesas are driven by acquisitions.
  • The results of the Broadcom storage division also indicates growth in the data centre.
  • Wireless, Industrial, Analog, IOT and sensors are high on the list.
  • Embedded micro has done reasonable but below market growth.
  • The automotive business has been disappointing despite much talk.


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           – Electronic Companies buy Semiconductors

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Nvidia’s Earnings report and call

Nvidia reported another great quarter. Revenue was up and growth rates continued to be strong although slightly lower than earlier.

Operating income followed.

And for the first time Nvidia was able to generate over 1B$ in operating cashflow and in free cashflow.

The earnings release and conference call revealed the following:

  • The cryptocurrency mining impact on the business is hard to quantify but is reported as OEM revenue. Although significant in size, it is not going to distract Nvidia from the strategic business areas. It remains an opportunistic opportunity for the company. The revenue was 70m$ in Q3 vs 150m$ last quarter. Whenever a currency becomes too large or too difficult to mine it become viable to optimise it in an ASIC. 
  • The newly introduced Volta processor is delivering 10x performance in deep learning applications, far outpacing Moore’s law. Volta is already ramping significantly in all major cloud data centres.
  • The TensorRT platform suggests a Nvidia move into a more software-based approach in the hyper-scale data centre.
  • Three major Chinese customers have adopted the Volta V100. Alibaba, Baidu and Tencent will join Amazon, Facebook, Google and Microsoft in using the GPU for AI in their datacenters.
  • Volta has also penetrated the main server customers enabling server-based AI.
  • The attendance and downloads of AI-related conferences and software has increased by 5 to 10x over the last couple of years
  • Within the data centre, the main areas for GPU’s are
    • Supercomputing or high-performance computing. This is a 11B$ market in which Nvidia has a 15% (733m$) market share.
    • Deep Learning Training
    • Inference – the queries made by billions of internet users to the data centre. Today this is supported by CPU’s but GPU’s can increase the network speed by 100x
    • AI as a Service or Public Cloud AI Services – multi-billion dollar opportunity for Nvidia.
    • Vertical Industries: Automotive ADAS, Healthcare Diagnostics, Manufacturing, Robotics, Logistical industries
  • Nvidia sees the vertical industries as the largest opportunity and they are now ready to address them with the GPU capabilities in the cloud.
  • Volta is only in its infancy and the expectation is that it will continue to grow while the graphics part of the business is seasonal.
  • Cloud customers either have Volta capability or has announced it and the customer need is expected to be high.
  • GPU for graphics is sold one at the time, heavily influenced by seasonality and game launches. E-sports is becoming increasingly attractive and having the best gear drives down latency and impacts a players ability to win. The other element is high graphically attractive content. The last element is social – people want to share their brightest moments and that requires performance.
  • Volta is the single biggest processor that humanity has ever made. 20B transistors, 3D packing, the fastest memories available,  a couple of hundred watts replacing hundreds of CPU’s.
  • Nvidia is a one architecture company. This is not a limiting factor as there is so much software, numerical libraries, inference software, compilers and other. Jen-Hsun believes this is a massive advantage for Nvidia and makes the company perform at a level that requires much more people if you use multiple architectures.
  • Customers have many choices on what architecture to select. Jen-Hsun believes that the strong commitment that Nvidia has to a single architecture is convincing customers that Nvidia is a safe bet.
  • The world is experiencing computing problems on a scale we have not seen before and High-Performance Computing and AI have never been more attractive.
  • On the cooperation and announcements of AMD and Intel, Jen-Hsun believes Rodger leaving AMD is a great loss for the company. The Modern GPU is not a (G)PU’s anymore. They are not limited to graphical.

You can get the Q4-17 Strategic Factbook on Nvidia here


Semiconductor threesome

With the recent news that Broadcom is considering making a bid for Qualcomm at a 27% premium over the opening stock price today, the merger mania is back on again. The two largest mergers in the semiconductor industry Broadcom/Avago and Qualcomm/NXP might be merging. The super merger will be valued at 104B$ total prior to Qualcomm buying NXP. Already in trouble with the EU, this merger could include or exclude NXP. Although the announcement of Broadcom moving its legal headquarter address from Singapore to Delaware, USA is likely to appease the US authorities, the merger is likely to face opposition in Europe, China, Taiwan and Korea.

Market dominance issues (Q2 Figures)

If a merger included all three companies the market situation in the semiconductor market would face the largest impact in the communication category. This does not include smartphones and similar products that we categorise as consumer products. The combined company would own close to 50% of the communication market, which will face scrutiny from the authorities. 


The issue becomes even bigger when viewed from a product perspective. The combined company would dominate the communication products category with over 70% market-share. Broadcom is already half the market while Qualcomm is the second largest player.



The product/market combinations produce create 3 large combos: Processing LSI to mobile, Communication products to mobile and communication products to the communication market. Those three combos can account for more than 60% of the revenue

Combined Financials: 

The combined company would be a very clear number 3 in the industry behind Samsung and Intel

Although a merger does not create a sum of all the numbers of the merging companies it can still be meaningful to look at the combined company. As can be seen from the combined revenue the new company would be growth challenged. 



None of the three companies has had stellar growth in a hot market.




The capital investments will be significantly lower than depreciations indicating contraction of manufacturing activity. The combined company will own fabs but it will be a fab light model.

The net Income will also be challenged, right now dominated by the difficulties of Qualcomm.


You can get the entire visual data report here: Broadcom, Qualcomm, NXP Merger

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