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Touch is Under Attack, Say Bears; Bright Prospects

Shares of touch-sensor maker Cypress Semiconductor are down 74 cents, or over 6%, at $10.86 as several analysts this morning cut estimates and price targets afterwards the company yesterday morning missed Q2 revenue estimates and forecast this quarter’s results then below consensus.

The immediate problem is the company is trying to find growth outside of the two dominant handset makers, Apple, and Samsung Electronics (005930KS).

Glen Yeung of Citigroup, who has a Neutral rating on the stock, cut his price target today to $13 from $17, writing that Cypress is pressed to get around the tremendous market share of the iPhone and Samsung’s phones based on Google‘s Android:

The two largest handset vendors using

With the two largest handset vendors using, or moving towards using other solutions for touch controllers, Cypress and its competition will cobble their respective shares from the handset market that remains. One concern we have is Cypress's belief that in-cell won't be important for the market outside of Apple. With the iPhone 5 likely to use in-cell, and the market likely to follow as it has in the past, there is risk Cypress may miss this trend. Similarly, our second concern is Cypress's expectation that touch-enabled Win8 systems won't be significant for 2-3 years; of all the drivers of Win8 sales, our software analyst Walter Pritchard feels touch is likely the most important, and sees the industry adopting this broadly in 2013, adding risk Cypress may this trend as so then.

For the moment, Cypress is in fact benefitting from Samsung’s sales of the “Galaxy S III” smartphone, as observed by Pacific Crest’s John Vinh.

Cypress sees TrueTouch mix in 2012 to be 90% to 95% smartphones versus 5% to 10% eReaders/tablets. We are modeling $197.7 million in TrueTouch earnings for 2012, which, at the midpoint, implies $14.8 million in eReader earnings. This is consis- tent with our recently lowered Amazon.com eReader build forecast of ~5 million units and, in our analysis, confirms that Atmel has won the Kindle Fire refresh.

Likewise, JP Morgan’s Christopher Danely today reiterates an Underweight rating on Cypress shares, and cuts his price target to $10 from $11. He cut his 2012 revenue estimate from $840 million to $806 million,, and cut his EPS from 8 cents to 3 cents, and cut his 2013 estimate by $40 million to $895 million.

One of the reasons we are Underweight CY is our fear of commoditization in its touch business and resulting multiple compression. Cypress' touch business is expected to decline YoY while 2012 and gross margins in Cypress' PSD division have declined in five of the last six quarters, and are nearly 10% below the 4Q10 peak in spite of higher revenue.

Betsy Van Hees with Wedbush Securities reiterated an Outperform rating however cut her price target to $14 from $15, yet she writes that “downside risk to the stock at this level is limited,” because “when the macro improves” the company “will benefit from TrueTouch/PSoC product cycles” and trends in mobile and cloud computing.

The company can get from the touch market

Harrison thinks there’s after all lots more payoff the company can get from the touch market: “During the outlook leaves investors disappointed and wanting more growth, we believe the business remains then positioned for upside in 2H12 and 2013.”

Over the straightway several quarters we expect the E-reader market and lower-end smartphone platforms to drive growth for TrueTouch, with over 90% of the revenues for all that coming from handsets. Capsense as well has done then and should continue to grow based on current design wins.

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Tech Trader Daily is a blog on innovation investing written by Barron's veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.

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