How Will Motorola's Problems Affect Small Wireless Chip Makers?

Eric Savitz noted last week that poor results from Motorola’s (MOT) quarterly financial report have cast doubt on the fortunes of chip makers that supply parts for cell phones.

On top of falling prices for handsets that could pressure profits for companies that make chips for those phones, Deutsche Bank analyst Brian Modoff today brings up a concern that’s been out there for these chip makers for some time now, namely that the smaller vendors, such as RF Micro Devices (RFMD), are going to have a harder time of things as the larger firms, including Texas Instruments (TXN), gobble up an increasing share of the business:

[Storm Clouds Gathering] We are lowering our price target for RFMD (Sell, $6.65) from $6.75 to $5, Silicon Labs (SLAB) (Sell, $33.36) from $30 to $25, and Skyworks Solutions (SWKS) (Sell, $6.75) from $7 to $6 on concerns over valuation. Fundamental trends also remain challenging. Larger silicon vendors are becoming more aggressive in the wireless space. Increased competition favours these larger vendors with the scale to integrated increased functionality into their product offerings. This cuts directly into sales of single-chip architectures a key growth segment for many of the smaller RF vendors. Our latest checks confirm this.

Not everyone’s so skeptical. Daniel Amir, with W.R. Hambrecht, acknowledges the risks to wireless chip vendors as a result of Motorola’s problems, but he says that as far as Skyworks is concerned, at least, he is sticking to a Buy rating on the stock and an $8.50 price target despite lowering his sales and profit estimates:

[W]e are also growing more concerned regarding the existing inventory build of handsets in Asia which could negatively impact the company further this quarter. As a result, we now expect calendar Q4 revenues and proforma EPS to be $190.0M and $0.11, down from $194.6M and $0.13 previously. Our new estimates are slightly lower than guidance given during the last earnings call in November of a proforma earnings per share range of $0.12-0.14. Despite the challenging environment in the handset market in the short term, we believe that Skyworks’ risk/reward remains quite compelling considering the company’s potential earnings strength in fiscal year ‘07 due to the following: 1) the exit of the baseband business which likely provides an opportunity for Skyworks to be more focused on its core analog and RF business where it has a competitive advantage; 2) the potential upside of EDGE design wins as Skyworks already has major shipments at Samsung and Motorola; and 3) the ramp-up of Linear products, which could reach an annual run rate of $200M by the end of this year which command higher gross margin than the handset business.

Skyworks shares are up 3% at $6.96. RF Micro shares are down just slightly at $6.63, and Silicon Labs shares are up slightly at $33.43.