In the world of TV sets, thin is in as a parade of flat-panel wonders become the darlings of the boob-tube-watching masses. And as the industry undergoes its biggest makeover since the advent of color, the U.S. winners may well be the chipmakers that supply the top TV brands and discount models alike.
The easiest bet is Texas Instruments (TXN). In the fast-growing market for digital light-processing, or DLP, projection TV, TI is the only game in town. The chipmaker's DLP business represents 8% to 10% of its $12.6 billion in sales, up from virtually nothing just two years ago. Thanks in part to this business, TI is enjoying a 55% jump in 2004 earnings, which will moderate to a 25% gain in 2005, predicts analyst Rick Whittington at brokerage firm Caris & Co. He rates the stock a bargain at 21 times its estimated 2005 earnings, compared with its 10-year average of 29.
Investors looking for a promising smaller player can size up graphics chipmaker ATI Technologies. Already a leader in high-end graphics cards for personal computers, Thornhill (Ont.)-based ATI has branched into the digital-TV and cellular-handset market, a smart move if PC sales sink next year, as some expect. Motorola Inc.'s (MOT) sleek Razr V3 videophone sports ATI's Imageon processor, while many TV makers are baking ATI chips into built-in set-top boxes. ATI trades at 19 times 2004 earnings estimates, but Goldman, Sachs & Co. (GS) analyst Andrew Root expects its price-earnings ratio to rise to 20 in 2005.
As the demand for flat-panel TVs zooms, so does the market for the chips that grab TV signals out of air and decode the stunning, crystal-clear pictures of these flat screens. One of the leaders, Sunnyvale (Calif.)-based Zoran Corp. (ZRAN), is not cheap at nearly 34 times estimated 2005 earnings. Still, it now trades at just under half its 52-week high, which may present a buying opportunity. Zoran took a tumble in October after it lowered its fourth-quarter forecast because of increasing inventories of DVD chips. But the company is working to wean itself from that price-sensitive market and move into higher-volume digital TV and cell-phone chip sales.
These bets could fail if the economy falters and consumers figure their analog TVs will suffice. But little looks likely to rain on this parade, and chipmakers will go along for the ride.
By Cliff Edwards