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Coverage Initiation: Maxim Integrated Products (MXIM)
Maxim Integrated Products (MXIM) designs, develops, manufactures, and markets linear and mixed-signal integrated circuits. The company was founded in 1983 and its customer base is large, global, and spread across a broad range of industries. It serves four major areas: Industrial, Communications, Consumer, and Computing. These four areas include such diverse subgroups as automatic test equipment, military and aerospace, cell phones, digital cameras, home entertainment and appliances, and notebook computers, among many others.
Electronic signals are generally either linear or digital. Linear (also called analog) signals represent real world phenomena, such as temperature or speed, and are continuously variable over a wide range of values. Digital signals represent the "ones" and "zeros" of binary code and are either on or off. This results in three different types of semiconductor products: linear, digital, and mixed-signal. Maxim targets the linear and mixed-signal markets, often collectively referred to as the analog market. That said, some of its products are exclusively or principally digital.
Maxim primarily manufactures its own “wafers,” which are the basis for microchips, however, it also utilizes third-party silicon foundries to produce wafers, too. The company makes use of a range of manufacturing process technologies to meet the needs of its client base. Regardless of where or how they were created, most processed wafers are subjected to testing at Maxim facilities.
The chip manufacturer has four U.S. facilities, two in Texas and one each in Oregon and California. These properties include both chip fabrication plants and processing sites. In fiscal year 2011, approximately two-thirds of the company’s chips were manufactured in its own facilities. Final testing, sorting, and shipping, however, generally takes place at facilities located in the Philippines and Thailand, though independent subcontractors are also used to perform wafer sorting and testing.
The company markets its products worldwide via direct sales through its own and other unaffiliated distribution channels. Its end customers span a broad range of diverse industries and its products typically require a sophisticated technical sales and marketing effort. Maxim divides its sales group into domestic and international regions. Distributors and direct customers generally buy on an individual purchase order basis, rather than take on to long-term agreements. Contract terms vary widely depending on the customer.
About 30% of fiscal 2011 revenue came from sales made through distributors; Avnet Electronics accounted for 14% of revenues in fiscal 2011. Samsung, meanwhile, is Maxim’s largest single customer, excluding its distributors, accounting for approximately 12% of net revenues in fiscal year 2011. No other customer accounted for more than 10% of revenue in that year, and no single product accounted for more than 10% of revenues. International sales contributed approximately 85% of revenues in fiscal year 2011. Although independent distributors are an important sales channel for the company, there is always the risk that individual distributors, who also sell competitors’ products, could stop selling Maxim’s chips.
The semiconductor industry is somewhat cyclical, which subjects Maxim and its competitors to often wide swings in demand and pricing. Economic patterns, thus, can have an outsized impact on the company’s operations and financial performance. However, the cyclical nature of the industry is also a factor of supply and demand for chips, which can be affected by capacity constraints and overcapacity, which heightens the need for proper planning. Complicating this is the fact that customers can, and often do, cancel orders on short notice with little to no economic impact on the customer. Thus, while backlog information (orders that are booked but not yet filled) is interesting, there is always the possibility that orders in the backlog will fall through. Note that, with such a large portion of the company’s business coming from foreign markets, it is important to monitor more than just U.S. economic patterns when reviewing this company.
Research and development is another key issue for Maxim, as technology in the semiconductor industry is constantly evolving. This makes spending on future products not just important, but mandatory, as old technology becomes quickly obsolete. In fiscal 2011, Maxim R&D spending was about 20% of total revenues—in 2009, this figure was over 30%. The company’s technology is protected by a number of key patents. However, these are of limited value if Maxim’s competitors introduce more advanced products and production processes. Moreover, because the company’s products must often work with products created by other companies, it often has to license the right to use certain technologies in its products, increasing production costs.
Maxim must also contend with both environmental and trade regulations. Changes in these rules may require the company to materially alter its processes, which would result in increased costs. Note that with a global footprint, the rules and regulations with which the company must comply go far beyond those in the domestic market.
Maxim has grown materially since its founding. It is a large company with a relatively solid financial position. Although the changing tides in the semiconductor space can be difficult to navigate, management has done a decent job, so far, of keeping the company on course. Interested subscribers are encouraged to review Value Line’s regular quarterly reports to monitor Maxim’s progress, and keep an eye out for Supplemental reports providing insight into fast-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.