Recently, Verizon (VZ) CEO Lowell McAdam shared via The Wall Street Journal that Verizon is working with Google (GOOG) to create a tabled device to compete against both Apple (AAPL) and AT&T (T). In our view, this comes as little surprise as it replicates the competitive response to Apple’s iPhone, which paved the way for touch enabled smartphones and app stores.
We expect this response to continue and would expect similar actions to be taken by Sprint (S), and T-Mobile USA (DT) on the service side as well as hardware/device companies, such as Dell (DELL), Hewlett-Packard (HPQ), Samsung, LG and the like. In our view, this simply underscores one of the key themes we believe to be driving the mobile ecosystem – cellular moving beyond mobile phones.
We do expect the tablet space to be a competitive one with many companies throwing their respective hats into the ring, much the way we saw in first the PC market then mobile phones and most recently smartphones. While many strived to garner share, we can count the key players that are still standing today for each of those first two markets on one hand.
What will be more telling in our opinion is watching to see which other companies enter the fray. Will all of those consumer electronic companies that are bringing Android and other smartphones to market, like Acer (ACEIF.PK), Lenovo (LNVGF.PK) and others, look to join the tablet fight? What of the mobile phone manufacturers like Nokia (NOK), Motorola (MOT) and Sony Ericsson that were the stalwarts of the 2G era? Lastly, we should not rule out some response from cable companies, like Comcast (CMCSA) and Cox, that are need to offer at least some competitive response for mobile as well as extend to protect their position as an era of connected devices not just mobile devices comes into play.
While many will focus on the devices themselves and the pending carnage that will replicate what we have seen before in the PC market and mobile phones – frenzied entrance followed by competitive pricing pressure that squeezes profits until eventual consolidation occurs – and are about to see in the smartphone space, we would argue investors should examine the derivative plays. Or as we like to say, buy the bullets not the guns.
As with the touch phone smartphone explosion, there are several companies positioned to benefit. With Wi-Fi, cellular, GPS and a host of other semiconductors such as application processors as well as memory, and capacitive touch enabled LCD glass, the tablet market offers incremental growth for more than a few companies. From our vantage point, some of the better-positioned companies include Skyworks (SWKS), Qualcomm (QCOM), Synaptics (SYNA), InterDigital (IDCC) and to a lesser extent RF Micro Devices (RFMD). Other beneficiaries will be Broadcom (BRCM), Infineon (IFXA), ARM Holdings (ARMH), Cypress Semiconductor (CY) and Atmel (ATML)
We clearly favor that first set of companies, particularly Synaptics given its strong position in the capacitive touch market as well as its existing relationship with Google. While Synaptics has not commented on its being in a touchpad, the combination of its presence in the capacitive touchscreen market combined with rumblings from several of its customers across notebook computers and smartphones, including HP, Samsung and others including the aforementioned Google, lead us to believe that Synaptics should be well positioned in the tablet market. Moreover, the potential for upside in revenues and earnings exists given favorable ASPs associated with the larger solutions for a tablet compared to that for a notebook touchpad or capacitive touchscreen for a smartphone.
The one uncertainty is the timing of when these iPad responses will be launched. A conservative view would say there is more to be had in 2011 than in 2010, but there could be some upside to the second half of 2010 expectations. This would amplify the seasonal nature of the mobile ecosystem and continue the stronger second half of the calendar year EPS generation that has historically led to meaningful operating margin expansion for the group.
For Synaptics in particular, success in the tablet market as well as greater gains in the smartphone market are likely to result in upward revisions to Street consensus expectations of $2.24 in 2011, which compares to $2.43 in CY2010. The rising tide argument for touchpads and the expanding capacitive touch market also bodes well for Atmel and Cypress given the presence that those two enjoy in the touch market alongside Synaptics.
That said however, we suspect the potential upside revision to be the greatest at Synaptics given the earnings growth of 78% and 16% the Street currently forecasts for Atmel and Cypress, respectively in CY2011 over CY2010 versus an earnings contraction for Synaptics in 2011 versus 2010.
Disclosure: No positions