In the Chips: Tech Takeover Targets

11/20/2015 8:00 am EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

In an overall industry that is only getting more competitive, chipmakers know that if they get bigger via acquisitions they can quickly benefit from economies of scale, suggests Rob Defrancesco in Smart Tech Investor.

There are a couple of smaller chipmakers with promising growth prospects (driven by new product cycles) that represent viable potential buyout targets.

One is Monolithic Power Systems (MPWR), a provider of power management solutions for the industrial, communications, cloud computing, automotive, and consumer markets.

The company operates in attractive segments that offer high margins, while its products tend to be sticky, meaning customers are usually locked in for the long haul. Recently trading around $57 a share, Monolithic Power has a market cap of $2.2 billion.

The company generates about 44% of its revenue from its consumer unit, making chips for home appliances, battery management, LED lighting, and gaming.

The consumer piece of the business has been gaining upside momentum, with revenue in the second quarter rising 24% year-over-year.

Chips used for telecom infrastructure account for about 21% of total revenue, while the industrial business (chips for autos, smart meters, security, and power sources) provided 20% of revenue and advanced 34%.

Revenue from the storage and computing unit (15% of revenue) rose 16%, with growth driven mainly by sales into the Cloud and high end PC segments.

After several years of R&D efforts, Monolithic Power recently announced that it would begin making solutions for advanced motion control, expanding its addressable market by as much as $3 billion.

Motion control solutions are needed in anything requiring precise movement. Use cases include drones, robots, and automobiles.

Within the auto segment, there are plenty of niches where motion control chips could replace mechanical parts, resulting in big savings for automakers.

Cavium (CAVM), a provider of networking and communications chips, is another potential acquisition target.

In terms of end markets, the enterprise/datacenter segment makes up half of the company’s total revenue, while service providers represent 40% and broadband accounts for 10%.

Thanks to its strong technology lead, the chipmaker is experiencing solid demand across its entire product portfolio, as hefty increases in global mobile data traffic and cloud datacenter IP traffic sharply boost the requirements for network performance.

This past summer, Cavium expanded its core Octeon networking chip portfolio by adding low-power processors that meet the special requirements of compact networking/security appliances and storage appliances.

Cavium’s new Thunder ARM-based datacenter and Cloud processor is expected to be the company’s largest 2016 incremental revenue generator. An extension of Octeon, Thunder expands Cavium’s presence in the $12-billion datacenter silicon market.

More than 30 customers are actively engaged in Thunder trials; the response so far has been quite positive, with many evaluations already resulting in design wins.

Thunder specifically addresses the roughly $2.5-billion data-plane segment of the datacenter market, which covers packet processing for traffic going into and out of the Cloud.

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