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On May 8, 2014, we issued an updated research report on Infineon Technologies AG (IFNNY - Analyst Report). The company recently reported a modest second quarter with increased revenues and earnings. Revenues also increased across all its segments.

Infineon is positive about its performances in the automotive sector, Power Management & Multimarket, and Chip, Card & Security segments. However, huge capital investments and the increasing competition from the emerging nations like China might prove to be headwinds going forward.

Infineon is a market leader in each of its target markets and is the second largest manufacturer of semiconductors in Europe. The company is not only a leader in the power semiconductor segment as well as the security and access technology segment, but also has achieved the leading position in the automobile sector.

The company’s semiconductor business is expected to enter an up-cycle, as the commencement of every semiconductor up-cycle usually begins at a time of macroeconomic uncertainty. Furthermore, the company makes huge capital investments along with significant investments in research and development. In the last quarter, Infineon spent €136 million ($186.4 million) on research and development.    

The power semiconductor sector is expected to be one of the fastest growing areas in the semiconductor space as a whole due to its ever-increasing use in motors and electronic devices to improve energy efficiency. For 2013 as well, the market research firm, IHS has ranked the company as the second largest supplier of silicon MEMS microphone with a market share of 29.8%.

The company is also strengthening its position in the promising markets like silicon microphones and security for NFC-based applications. However, the company’s semiconductor business in China is likely to be impacted by the production of IGBT chips in China which are expected to be produced as soon as this year itself. The China Southern Railway, one of the big clients of Infineon, will be producing these chips.

However, the company’s business in particular and the semiconductor industry in general are highly cyclical and characterized by constant and rapid technological change. The products are prone to rapid obsolescence and price erosion owing to evolving standards and wide fluctuations in demand and supply. In the preceding quarter (first-quarter 2014), the company’s revenues contracted 7% sequentially.

Also, the company has been developing the latest 300 millimeter chips in power technologies that are expected to require as much as 20% of company’s capital expenditure budget in the year. Though it is likely to benefit the company by expanding its capacity significantly in the long run, the company’s results will be dragged down due to the incremental costs in the near term.

Infineon currently has a Zacks Rank #2 (Buy). Some other companies operating in the same industry worth considering include PLX Technology Inc. , Rambus Inc. (RMBS - Snapshot Report) and Advanced Semiconductor Engineering Inc. (ASX - Snapshot Report). While PLX Technology and Rambus hold a Zacks Rank #1 (Strong Buy), Advanced Semiconductor Engineering carries the same rank as Infineon.

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