Ultra HD (a.k.a. 4K) TVs continue to experience accelerating demand. After a recession-elongated HD cycle, a new replacement cycle is ramping vigorously.
As proof, IDC (one of my early employers) now says that over a million units are shipping per month. The company was thus compelled to raise its 2014 Ultra HD estimate from 15.2 million units to 17.4 million units. Aggressive pricing (average cost of $1,600 in Q1 is falling fast) and rapid content proliferation are driving this trend faster than even I expected. Sony, Samsung, and LG are leading the charge (Sony and LG are PXLW customers).
IDC believes that shipments could hit 100 million units in 2018. If so, we're looking at a 55% growth rate over the next 4+ years. This all plays into the hands of leading video processing providers, especially Pixelworks (NASDAQ:PXLW).
Pixelworks' portfolio of patents is particularly strong in the areas of Ultra HD and mobile video processing. Not surprisingly, Pixelworks has been quite active over the past month. The flurry of positive tidings started with its Q1 earnings report, which sent the stock running on its beat-and-raise performance. CEO Bruce Walicek added to the earnings festivities by revealing that Pixelworks had received mass-production qualification for its co-developed chip. We believe the chip is for a tier-1 projector TV vendor (another TV category that is quickly heating up, due in part to excitement over this year's World Cup).
On the mobile front, Pixelworks demonstrated the world's first mobile video display processor at Computex on Monday. With video emerging as the Internet's "killer app", mobile devices are racing to provide customers with cinematic picture quality. 4K will be a centerpiece, especially as user-generated content begins to flood outlets like YouTube. Companies like GoPro (NASDAQ:GPRO) are enabling this to become an immediate-term reality.
Scanning the landscape, we find several signs that the Ultra HD TV cycle is ramping faster than many (including I) anticipated. Earlier this week, Conn's (NASDAQ:CONN), a retailer of durable consumer goods in Texas, Arizona, Louisiana, Oklahoma, and New Mexico, reported that television sales were down 2% in Q1. However, sales of Ultra HD TVs (a.k.a. 4K TVs) increased from 4% of LED television sales in Q1 to 10% in May. On the conference call the company said, "pricing is becoming much more attractive and we now have 4K on the floor at prices below $2,500. We think 4K will help us maintain television sales and ASP over the remainder of the year."
This coincides with a new Digitimes report that Ultra HD TV panel shipments are expected to reach 17.8 million units in 2014, up 475% year over year. Samsung Display and LG Display (a PXLW customer) are expected to garner almost 40% market share. Shipments are expected to reach 72.5 million in 2017, representing a 60% annual growth rate in one of PXLW's sweet spots.
This all sets the stage for continued good fortune, if not a buyout offer, for Pixelworks. Indeed, my original thesis asserting that Apple (NASDAQ:AAPL) needs to obtain video processing technology to compete with Samsung's remains fully intact. Apple subsequently lent credence to that claim by becoming a 10% customer of PXLW.
Since then, conspicuous hints have kept coming.
Soon after the original Apple revelation, Apple's former VP of Hardware Engineering (David J. Tupman) joined Pixelworks' board of directors. Then, On May 23 (suspiciously prior to a long holiday weekend), PXLW filed an 8-K with the SEC. The filing disclosed PXLW's approval of an amendment to the terms of its change-of-control agreement with certain officers of the company. This is generally not a move that occurs in a vacuum. Often, it is the precursor to acquisition talks or an actual acquisition announcement.
To be clear, I'm not saying that PXLW is about to be acquired. However, this type of filing has historically increased the odds of it happening. In the meantime, the company doesn't seem to need a buyout. It's clearly doing quite well on its own. The shares are up 100% since our initiation report last June.
Disclosure: I am long PXLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Aspects of this article appeared in the June 2 edition of the PTT Newsletter. Mr. Gomes' investment Methodology serves as the basis of his selection process, asset allocation, and trading decisions. Investors who seek to act on his research should first read his Methodology at PoisedToTriple.com.