Should Israel fabless semiconductor company Ceva Inc. (Nasdaq:CEVA); LSE:CVA) be traded at a higher price in the wake of the $40 billion acquisition of ARM by Nvidia? Investment house Northland Capital Markets thinks so. Northland has upgraded its recommendation for Ceva from "Market perform" to "Outperform", and raised its price target for the stock from $37 to $48. Ceva closed at $37.81 in New York yesterday.
Ceva designs and licenses wireless connectivity and sensing platforms for semiconductor and OEM manufacturers. Its revenue derives from licensing of its intellectual property and from royalties on sales of devices containing its technology.
Gus Richard of Northland Capital Markets cites various factors in the firm's recommendation upgrade. Among them are that global intellectual property (IP) revenue remains strong, and the fact that, as an Israeli company, Ceva is not very likely to be affected by the trade war between the US and China. He also cites Ceva's exposure to the 5G infrastructures market, and the assessment that after the coronavirus crisis is over there will be growing use of various technologies that use Ceva products, such as contactless payment. Richard also sees Ceva's valuation as attractive in the light of recent IP acquisitions, in particular Nvidia's acquisition of ARM.
Richard points out that the $40 billion price tag for ARM reflects a multiple of 25 on 2019 revenue. He estimates that semiconductor IP revenue grew from $3.4 billion in 2016 to $3.9 billion in 2019, representing average annual growth of 4.5%, although ARM and Ceva's revenues were fairly static in this period. Even assuming that growth accelerates to 20% (which Richard describes as an optimistic assumption), revenue in 2024 will be at around $9.7 billion.
"We believe NVDA sees something else in the semiconductor IP business that is not selling licenses and collecting royalties as that is roughly 1% the value of the chip," Richard writes. "We believe that increasingly the semiconductor industry is moving to system in package requiring the sale of chiplets. We would expect the price of a chiplet to be 50x to 100x the price of the IP royalty. NVDA might plan on selling chiplet ARM processors along with semiconductor IP. This model would be consistent with "IP revenue" growing to $10s of billions by 2024.
"Ceva has a strong DSP IP portfolio used for cellular, WiFi BT, audio, and video processing. These are the chips that sit next to ARM IP in a wide variety application. While not as pervasive Ceva is the 6th largest IP vendor."
Richard also sees Ceva technology being oncorporated in Aplle's iPhone 13, due out in the second half of 2022, "Apple/Intel 4G revenue has flattened out as Apple/QCOM 5G phones have been pushed out. The delay in Apple's new 5G phones shortens the time Apple will use QCOM 5G modems, and we expect Apple to switch to internally designed Ceva IP based 5G modems in the iPhone 13 likely launched in the second half of 2022," he writes.
As mentioned, Richard sets a $48 price target for Ceva. This is on the basis of a multiple of 11 on expected revenue in 2021. Ceva, headed by Gideon Wertheizer, has a current market cap on Nasdaq of $825 million. Three years ago, its stock was traded at over $51, but it has weakened since then, although since the beginning of 2020 it has risen by 40%.
Published by Globes, Israel business news - en.globes.co.il - on September 23, 2020
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