Wunderlich Securities chip analyst William Harrison today initiates coverage of storage and communications chip maker LSI (LSI) with a Buy rating and a $9 price target, writing that the company should benefit from its early entry into the NAND flash-based storage market, meaning “solid state drives,” or SSDs, and also from its chips for wireless base station equipment.
Writes, Harrison, “LSI addresses a number of attractive market segments in the storage, server, NAND Flash, and wireless base station infrastructure markets that should benefit from overall increasing demand for storage and networking traffic.”
He ads that “Many of these markets are controlled by a few large OEMs, where LSI has an established presence, while in the emerging segments the company has made significant product investments that should lead to growth and market share expansion in 2013 and beyond.”
LSI’s biggest product category by revenue is storage and servers, he notes, making up 79% of total revenue in Q3, where LSI competes with PMC-Sierra (PMCS) in what Harrison characterizes as a duopoly.
Although controller chips for SSDs are just 16% of revenue, Harrison is impressed with the position LSI is taking in the market, and he doesn’t think that will be slowed by equipment makers buying their own chip companies:
On the component side, LSI is emerging as the leading merchant provider of NAND Flash storage processors and controllers (FSPs) to the various SSD markets. The company offers custom as well as off-the-shelf or merchant FSP solutions for the Enterprise and the Client SSD segments. This segment has come under a microscope more recently due to the number of acquisitions of private flash controller and SSD software companies by the SSD and NAND Flash OEMs in an attempt to bring the Flash controller technology in-house. We continue to believe the SSD market will be segmented with the largest piece likely to utilize the benefits of merchant solutions versus captive solutions (please see Appendix A at the end of this report where we address some of these issues in greater detail.) The company believes they can more than double the revenues in this business in 2012 and see outsized growth again in 2013.
As for the non-flash part of the business, “We expect LSI to benefit from the transition of 6 gig to 12 gig SAS throughout 2013 and into 2014, where they have an early-to-market advantage,” referring to “serial-attached SCSI” drives. EMC (EMC) and NetApp (NTAP) are among the largest customers for such products, he notes.
Harrison sees a better 2013 for LSI’s “Axxia” line of chips for base stations, which make up part of the 17% of revenue that comes from the networking industry:
LSI�s flagship Axxia processor family leverages the company�s legacy in PowerPC processor technology along with additional interface technology. More recently the company has announced the development of an ARM-core based Axxia family that will compete with the other ARM-based platforms being introduced. The wireless infrastructure market is the main opportunity for the Networking products and currently accounts for two thirds-plus of all networking revenue. The company has announced that is has won multiple designs for base station backhaul applications in the wireless infrastructure market that should drive growth in 2013 and beyond as these platforms transition to production. While the investment in wireless infrastructure in 2012 was a disappointing dud to the macro spending constraints by the carriers globally, we expect to see a targeted recovery in wireless investment following a difficult 2012 as LTE and 4G platforms begin to be deployed with greater density.
Harrison’s estimate for next year is $2.5 billion in revenue and 67 cents a share in profit, which is in line with consensus.
LSI shares today are up 5 cents, or 0.7%, at $6.96.
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