Inphi stock is trading near its highest point in years amid optimism over the semiconductor company's growth prospects, especially in the market for 100-gigabit optical networking technology.
Santa Clara, Calif.-based Inphi ( IPHI) makes and sells high-speed analog and mixed-signal semiconductor solutions to the communications, data center and computing markets.
The company also provides 40G and 100G high-speed analog semiconductor solutions for the communications market and high-speed memory interface solutions for the computing market.
Inphi stock touched a three-and-a-half year high of 19.70 on Jan. 5 and still trades near there.
The company has produced four straight quarters of double-digit revenue growth, thanks to demand for faster end-to-end networks amid what RBC Capital Markets analyst Doug Freedman calls a "data explosion."
"As LTE (long-term evolution communications) deployments expand, more data will be generated, consumed and transported, thereby increasing the need for faster fiber networks," Freedman noted in a report. When the fiber reaches the data center, he says, the data center traffic "increases yet again -- requiring a new, faster network within the data center."
Delivering The Data
This is where 100-gigabit, or 100G, ethernet networks come in -- and also where many analysts see much of Inphi's future growth.
"The company appears to be taking share as growth is being fueled by 100G uptake servicing the LTE and cloud market," Freedman noted.
Needham analyst N. Quinn Bolton offered a similar sentiment in a Dec. 29 report upgrading Inphi to "strong buy" from "buy," noting that Inphi "is positioned to outperform its peers given its significant exposure to the rapid growth of 100G optical networking."
He estimates that around three-quarters of Inphi's business is exposed to the migration of 100G optical from long-haul applications to metro and data center applications. "Long haul" means transmitting signals over optical fiber cable over distances such as between Los Angeles and San Francisco. Big infrastructure firms prefer to speed these systems up first, analysts say.
Metro and data center applications involve transmission over shorter-distance networks. An example would be the data center campus atGoogle ( GOOGL)
"We expect IPHI's core linear drivers, amplifiers and SERDES/CDR (Serializer-Deserializer/clock and data recovery) solutions will benefit from an expected 50% increase in 100G port shipments in 2015," Bolton noted.
Richard Shannon, an analyst at Craig-Hallum Capital, says that Samsung,Micron Technology (MU )
and SK Hynix are typical customers for Inphi's memory components.
"On the communications side, they sell to big OEMs (original equipment manufacturers) likeCisco (Systems) ( CSCO ) and Ciena ( CIEN )
" he told IBD. "The other group they would sell to would be module makers likeJDS Uniphase (JDSU),NeoPhotonics (NPTN) andFinisar (FNSR)."
A pickup in Inphi's business in the communications market has helped offset a slowdown in its memory business. The slowdown is partially due to a late start to the market for double-data-rate, fourth-generation register clock driver (DDR4-RCD) solutions.
DDR4 refers to the next evolution of dynamic random-access memory (DRAM) with the ultimate goal of improving the performance, memory and speed of servers.
"Despite weakness in Inphi's memory business and being late to DDR4, communications products are more than offsetting, allowing the company to meet/exceed their communicated goals," Freedman noted.
Strategic Buyout
In a press release announcing the buyout, Inphi called Cortina "an established leader in optical transport and networking interconnects" whose product portfolio includes products that span 1G to 100G Ethernet and Optical Transport Networks (OTNs).
"Cortina's success with these products has been validated with multiple design wins at tier one networking OEMs over the years, making Cortina a market leader in the network infrastructure segment," the press release said.
Officials at Inphi declined to comment for this story, citing a quiet period leading up to the company's fourth-quarter earnings report in early February.
Inphi shares shot up 24% when the Cortina buyout was announced on July 30, and analysts remain upbeat on the deal. Freedman called it "a smart acquisition" for Inphi, and one that came at a good price.
"The acquisition adds scale to Inphi's communications business and shifts its revenue mix away from a historically memory-heavy business to a communications-heavy business," Freedman noted.
He said that the memory business made up about 70% of company revenue in 2011 but that the communications business should produce more than 70% of it this year.
Acquisition Target?
In addition, Freedman said, the added scale that Cortina brings to Inphi's business makes Inphi "more attractive as an acquisition target and may garner more interest from larger semiconductor companies previously not interested in Inphi due to its memory mix."
Freedman did not mention companies that might be interested in buying Inphi. However, larger companies that deal in the same types of products includeBroadcom (BRCM) andTexas Instruments (TXN).
Bolton notes that Cortina has had "an immediate accretive impact" on Inphi's top-line growth and corporate margins.
"We model Cortina Systems will contribute $80 million of revenue in 2015, up from $20 million in 2014," he wrote.
During its third quarter, Inphi reported revenue of $36.3 million, up 36% from a year earlier and in line with consensus estimates. Earnings tripled to 12 cents a share, topping views by a penny.
Analysts polled by Thomson Reuters expect Q4 profit of 20 cents a share, up from 8 cents a year earlier. Revenue is seen more than doubling to $58.6 million as the Cortina business adds to results.
Inphi has a 96 IBD Composite Rating. It is part of the Electronics-Semiconductor Fabless industry group, which ranks No. 7 of 197 that IBD tracks.
The group's top-rated companies, all with a Composite Rating of 99, areMonolithic Power Systems (MPWR),Cavium (CAVM),Avago Technologies (AVGO),NXP Semiconductors (NXPI) andAmbarella (AMBA). IBD's Composite Ratings factor in earnings growth, stock price gains and other metrics.
By Investor's Business Daily
Source: http://www.nasdaq.com/article/semiconductor-firm-inphi-sees-fast-growth-in-100g-cm432082#ixzz3OfhQHWCi
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