It’s a buyer’s market for American semiconductor stocks.

In March Nvidia bought Israeli-based Mellanox (NDQ: MLNX) for US$6.9 billion. Then, earlier this week, NXP announced it would buy Marvell Technology (NDQ: MRVL) for US$1.76 billion.

Finally on Wednesday, Cypress Semiconductor (NDQ: CY) announced it had received takeover interest and were considering offers. It jumped 12 per cent on Wednesday.

Could we see such a buying spree reach the ASX’s small cap semiconductor companies? The companies certainly hope so.

A number of those companies were at Pitt Street Research’s Semiconductor Conference earlier this month.

One of them, 4DS Memory (ASX: 4DS), made no secret of its ultimate goal through its executive appointments and strategic partnerships.

Non-executive chairman Jim Dorrian has exited companies with a value in excess of US$7 billion including BillMeLater, Arbor software, Onlink and DemandTec.

Since 2014, 4DS has had a partnership with Western Digital and managing director David MacAuliffe deemed it “our ideal exit partner considering their due diligence of us and they understand the technology”.

The technology alluded to is their ReRam (silicon oxide Resistive Random Access Memory), a combination of existing DRAM and NAND flash technology which is how memory is stored in electronic devices.

While relying on just one partner has potential to end badly, 4DS are also collaborating with the world’s number one independent semiconductor development institute – IMEC.

What do analysts think?

Of course the companies will say they could be quickly snapped up. But while analysts are rating some semiconductor stocks highly, they are taking a more cautious approach when the “A” word is mentioned.

Shaw & Partners analyst Darren Vincent told Stockhead that while an acquisition could happen, it was more likely in the longer term. When it was suggested that the ASX was a mini-NASDAQ, he was quick to point to the NASDAQ’s larger size.

“You’ve got to draw a distinction between industry interest and the practicalities of going onto the NASDAQ. The NASDAQ is more expensive and companies of this size tend to get lost whereas in Australia they’ll get coverage,” he said.

“[American] venture capital tends to be expensive and a lot of venture capital funds are looking to SaaS [software as a service] rather than capital equipment opportunities because there’s quicker paybacks [and it’s] not as high capital costs in the business,” he said.

Shaw and Partners have raised capital for several stocks including American chip builder Revasum (ASX: RVS). Revasum boss Jerry Cutini told the conference a US$30m deal for a company of Revasum’s size could not be done on the NASDAQ.

“We didn’t come by accident; we came on purpose because we thought it was the right market,” he said.

Shaw have put a target price of $2 on Revasum (ASX: RVS) and Pivotal Systems (ASX: PVS). Andrew Pridham-managed investment bank Moelis has also rated those semiconductor plays as buys, setting target prices of $1.84 and $2.44 respectively.

Moelis analyst Brendon Kelly told Stockhead: “Pivotal and Revasum have some unique IP in their respective segments of the industry and we expect both companies to be squarely within the sights of their peers as prospective acquisition targets in a few years time.”

Here’s a table of all the analyst recommendations made on ASX semiconductor small caps this year

Code Name Analyst Coverage (YTD) Firms Average Target Price Current Price
4DS 4DS MEMORY LTD 1 TMT 0.11 0.069
AKP AUDIO PIXELS HOLDINGS LTD 0 N/A 18.42
BCT BLUECHIIP LTD 1 CCZ 0.1 0.079
BLG BLUGLASS LTD 1 Wilsons 0.27 0.16
BRN BRAINCHIP HOLDINGS LTD 2 Shaw & TMT 0.34 0.06
DTZ DOTZ NANO LTD 0 N/A 0.06
KTE K2 ENERGY LTD 0 N/A 0.006
PVS PIVOTAL SYSTEMS CORP INC 2 Shaw & Moelis 2.28 1.64
RVS REVASUM INC 2 Shaw & Moelis 1.92 1.43
SE1 SENSERA LTD 1 TMT 0.48 0.11
SLZ SILEX SYSTEMS LTD 0 N/A 0.375
WBT WEEBIT NANO LTD 1 TMT 1.75 0.55

 

Why would you want to be bought out?

Money of course would be the reason for a buy-out. But not just so shareholders can get rich. It’s so the technology itself can become a reality.

“It would take a significant amount of investment to turn this into a significant product,” said 4DS’ MacAuliffe. “We’re trying to prove you can make a megabit chip with storage and being able to show this to a memory buyer and say ‘if you were to invest money you could make this a reality’.”

Other players would be open but do not have it as the be-all and end-all. BlueChiip (ASX: BCT) boss Andrew McLellan said his primary interest was “creating value”.

“As we get penetration in the market, we may get [acquisition] interest but it’s not of concern. We anticipate creating value no matter what,” he said.

His company’s technology is miniature chips, used to uniquely identify medical samples that need to be kept in extreme conditions (such as in liquid nitrogen).

“What do we compete with? Handwritten labels and bar codes,” McLellan said. “There’s no other technology on the planet that gets near that [liquid nitrogen temperatures].”

It is also important to bear in mind that with every capital raise you give away equity. Darren Vincent told Stockhead in regard to the Revasum IPO which Shaw ran last year, “no one wanted to give away all their equity at the types of valuations they [Revasum] were going to get at this stage”.

Simply put, the more dilutions there are, the less the pay-offs for earlier shareholders at any eventual exit.

What should investors look for in semiconductor stocks?

Vincent said investors should consider three factors: intellectual property, sales traction and the size of the market opportunity.

In regard to Revasum (ASX: RVS) and Pivotal Systems (ASX: PVL), he told Stockhead: “If you’re looking at Revasum and Pivotal, [consider] how definable the IP differentiation is.”

Collectively, semiconductor stocks are only slightly up this year, 2.5 per cent. But if any buyers were to come knocking, the experience with Purifloh (ASX: PUR) last November shows this could change.

Here’s a table of all ASX small cap semi conductor stocks

Code Name Price (30 May) Market Cap Total Return YTD (%)
4DS 4DS MEMORY LTD 0.069 $71.7m 24
AKP AUDIO PIXELS HOLDINGS LTD 18.42 $521.3m -9
BCT BLUECHIIP LTD 0.079 $41.6m 46
BLG BLUGLASS LTD 0.16 $66.9m -16
BRN BRAINCHIP HOLDINGS LTD 0.06 $64.0m -42
DTZ DOTZ NANO LTD 0.06 $11.8m -35
KTE K2 ENERGY LTD 0.006 $1.8m 0
PVS PIVOTAL SYSTEMS CORP 1.64 $183.8m 3
RVS REVASUM 1.43 $109.5m -21
SE1 SENSERA LTD 0.11 $30.0m 5
SLZ SILEX SYSTEMS LTD 0.375 $60.5m 97
WBT WEEBIT NANO LTD 0.55 $34.7m -22