I have covered the major semiconductor stocks earlier and listed my top 10 in the industry. For the semiconductor infrastructure stocks, here is a list of the top nine in the EDA, ATE and manufacturing equipment space, which may not be a healthy industry, but is still a must-have industry, especially as semiconductors have to be built.
Cadence, the largest EDA player, started tumbling last fiscal year and continues to languish. Its Q108 and Q208 results might have been marginally better than the Street’s expectations, but the stock did not react favorably. Cadence has been making a few interesting moves of late. It made a hostile takeover bid for Mentor. It might have revoked the bid in the following week, but at least the company is thinking big. In fact, it is now even looking at acquiring the struggling Magma.
The second-largest player, Synopsys, also does not seem to be having a good time. Synopsys’ issue is not with its own business, but with the industry, as was evident in its results announcement. The company acquired Synplicity earlier this year, and is also coming out with new products and building new relationships, such as those with National Semiconductor and ARM. The company will need to also be creative, as industry conditions are unlikely to relent.
The third-largest player, Mentor, has had a roller coaster quarter. The company can breathe easier now that Cadence’s hostile bid has been revoked, but no one knows for how long. If Cadence acquires Magma, for example, what would Mentor do?
Magma is being squeezed from both sides despite the acquisition of Sabio Labs and the launch of more efficient products earlier this year. While I would prefer that the company be bought off by Synopsys or Cadence, CEO Rajeev Madhavan’s ego might not allow it, making me wonder if Magma will just die on the vine. Recent rumblings in the industry, however, suggest that Madhavan is considering a deal.
After its merger with Credence, the automated test equipment manufacturer, LTX now trades as LTX-Credence and is one of my preferred companies for having taken the much-needed pioneering step towards consolidation in the ATE space. I am hopeful that in the next few years, we will see a much tighter integration between design and test, and potentially more conversations between the EDA and the ATE industry.
Verigy is another ATE manufacturer that took the merger route when it announced the acquisition of Inovys, which is a result of the industry’s move towards inserting “testers” into chips. The company’s acquisition and outlook for the coming quarters boosted the stock. It is also one of the healthier companies in the sector.
Applied Materials is the largest supplier of tools for making microchips and is one company that has realized the need to find adjacencies in the industry. AMAT had acquired the Italian manufacturer of crystalline silicon photovoltaic cells, Baccini SpA, last year and this year made a futile bid for the atomic layer deposition and plasma-enhanced chemical vapor deposition operations of the Dutch semiconductor equipment manufacturer, ASM International. Solar is their stated diversification strategy.
KLA-Tencor is the leader in yield management and process control solutions for semiconductor manufacturing and related industries, and is facing stiff times in the wake of the industry’s margin pressures. Like the other players, KLA is not only coming up with advanced products, but is also making consolidation moves. Earlier this year, they acquired ICOS, the Belgium-based leading supplier of equipment for visual inspection ICs. I’ll say it again: KLA needs to look at bigger adjacencies – something like ARM would make the market space buzz.
The final position in the top 9 list is awarded to Novellus, a leading semiconductor equipment manufacturer for thin-film deposition, surface preparation, and chemical mechanical planarization. To tackle the industry’s conditions, Novellus is not only looking at cost optimization, but also focusing on product development by both increasing the breadth of applications their tools address and improving the productivity and technological performance of their systems. It needs to realize that consolidation with ATE companies or other similar firms is necessary.
In summary, as semiconductors need to become cheaper, the margin pressure on the entire infrastructure sector will continue to drive consolidation. We can expect to see this list shrink to six within the next couple of years.