Ever wondered how the display on the iPhone manages to change orientation when you rotate the device through 90 degrees? Well, at the nerve centre of this cutting-edge handset is a clever microchip called a ‘three-axis digital gyroscope’. This has been developed by ST Microelectronics and is sold to Apple for around $2.50 a piece.
This motion-sensing technology is so accurate that it is likely to be incorporated into all kinds of consumer gadgets other than smartphones (think cameras, e-readers and remote controllers for toys, robots and vehicle telematics). Indeed, to date ST Micro has shipped more than 600 million units. That makes the company the number-one player in this booming sector, which IMS Research sees rocketing by 150% over the next
two years.
No wonder rivals such as Analog Devices, Epson/Toyocom and InvenSense, are trying to muscle in on the action. The latter already supplies its digital gyroscopes for the Nintendo Wii. Another worry is there are other competing sciences that may eventually supersede these smart chips. For instance, Microsoft’s revolutionary Kinect console uses 3D capture cameras – allowing the gaming system to sense motion even when a player is not using a controller.
ST Microelectronics (EuroNext: STM)
Nevertheless, ST Micro has many more strings to its bow than this. The company is the world’s fifth-largest semiconductor manufacturer, with outstanding franchises in multimedia, power consumption, sensing and connectivity. Meanwhile, the chip industry – although notoriously cyclical – has grown on average by 8% a year over the past decade. It is expected to leap 20% in 2010 to around $275bn.
Analysts are forecasting 2010 revenues and Ebita of $10.2bn and £390m respectively, equating to a bottom-of-the-cycle margin of 3.8%. However, given the long-term trends towards content digitisation and mobile computing, I believe the firm can lift this to north of 10% by 2012 on sales of $11bn. This goal seems very achievable, given Intel’s 30%-plus margins.
Assuming I’m right, I would value the organisation on a ten-times Ebita multiple. Discounting back at 12% and adding the net cash of $702m, that generates an intrinsic worth of about $10bn, or e8.40 a share (at a e/$ exchange rate of 1.3). Of course, nothing is risk-free. The chief concerns are those associated with a double-dip recession, the turnaround of the firm’s loss-making joint venture with Ericsson, price deflation, and product obsolescence. Even so, given a softening euro, ST Microelectronics looks well placed to prosper from the next stage of internet development.
Recommendation: SPECULATIVE BUY at e6.33 (market cap e5.8bn)