According to the IDC (International Data Corporation), the smartphone market will witness a CAGR of around 18% till 2016. Also, the tablet market will grow at a CAGR of about 23% during the same period. With this tremendous growth, the mobile chipset industry remains an interesting area for the investors to focus on. Let's discuss some of the big names in the industry, and find out where exists an opportunity to cash-in.
Digging the numbers
In January, QUALCOMM Incorporated (QCOM), reported its first-quarter results for the fiscal year 2013. The company not only surpassed the street's estimates, it even raised its guidance and targets for 2013. The revenue stood at $6.02 billion, which was up by 29% and 24% on yearly and quarterly basis respectively. The net income of $1.9 billion for the fourth quarter, increased by around 36% year-on-year and by 50% quarter-on-quarter. Its net income growth actually blew off all its earlier reported positive numbers. These figures clearly depict that Qualcomm is benefiting from a huge demand of smartphones. Expecting this trend to continue in the future, the company increased its EPS guidance to $4.25-$4.45 from the previous range of $4.12-$4.32.
With every passing quarter like this, I feel all the more optimistic about Qualcomm. Especially when the other competitors like Broadcom Corp (BRCM) posted in-line results along with a softer guidance. However, the stock reacted contrarily and was up following the results. This may be due to the revised guidance of the company in December, 2012, which had no high-hopes. Broadcom posted net revenue of $2.08 billion for its fourth quarter of 2012, which was up by around 14% on a year-on-year basis. But its decline of about 2% from the previous quarter was a concern area. The company even lost around 1% in revenue from its last quarter, in its most important segment - mobile & wireless, which contributes about 50% to its revenue.
LTE market getting intense
For these chip-makers, the Long Term Evolution (LTE) high-speed wireless technology remains a highly challenging segment to dominate the market. Currently, Qualcomm is leading this segment, with around 86% of total LTE chipsets supplied last year. Moving forward, the market for LTE wireless chips is going to get intense with a lot of chip-makers venturing in with possible alternatives to Qualcomm. Likewise, Broadcom recently launched its first LTE chip with production to start in 2014. The key differentiating aspects of this chip will be its smaller size, it consumes up to 35% less space which means, it is cheaper and efficient.
Last month, NVIDIA Corporation (NVDA) also marked its presence in this market by announcing its first Tegra 4i mobile LTE chip. The company is challenging Qualcomm Snapdragon S800 in terms of efficiency and battery life. Its production is expected somewhere around late 2013 or the first quarter of 2014. The company has already carved out a significant amount of market share for tablets with its Tegra SoC. But it would be interesting to see, whether it is able to create the same space in the LTE segment or not.
Even after these launches, I feel both the companies will have a tough time in grabbing some market share from Qualcomm. The company is the biggest supplier in the smartphone industry, and remains a top choice among the leading smartphone makers such as Apple and Samsung. Also, the company enjoys its dominance in the 4G LTE solutions, with no major competition for at least the next one year.
To further continue its dominance in this market, Qualcomm came up with its next generation of processors. It introduced the latest Snapdragon- 800 and 600 processors, which are targeting at the premium mobile and computing devices. The main advantage of the 800 processor is that it is fully coordinated with the 4G LTE modem, enhancing the performance. The 800 and 600 processors will arrive in the market in the mid and second quarter of 2013 respectively. Qualcomm has already secured around 50 different products that will be using these chips. Based on its previous success of Snapdragon S4, the company is hoping for a lot more. And, if rumours are to be believed, Samsung (SSNLF.PK) is also considering Qualcomm processors for its upcoming Galaxy S4.
The investing opportunity
Qualcomm has the lowest P/E ratio of 17.94 and the highest P/S ratio of 5.60 as compared to the industry averages. This is mainly due to the high profit margins of around 32%, which is driven by its premium high-end products and the big clients in its portfolio. Another reason to love this stock is its improved guidance numbers from the management, which shows 2013 to be a better year for the shareholders. I feel, the stock will continue to gain the momentum until it is enjoying its supremacy in the market. For an investor making an entry into this industry, Qualcomm is the safest and sure bet at this moment. I recommend a buy on this stock.
Turning on to Broadcom, the company has better chances compared with Nvidia to mark its presence in the LTE market based on its advantages in scale. Also, considering the forward P/E ratio, Broadcom is more attractive and cheap among its competitors, and this supports the upside potential in the stock. However, the long-term growth of both Broadcom and NVIDIA is highly dependent on to how well they plan their strategies to capture market share in the LTE segment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.