Uncovering investment opportunities in the smartphone market
Investment theme: Smartphones and tablets
Investment information for the principal mobile phone providers such as Apple and Samsung is abundant, yet there are a number of other companies in the mobile phone industry which may be of interest to investors. In this note, we explore some of the lesser known, but high quality companies providing key components to the smartphone industry.
According to a recent report issued by Cisco, in 2013 the traffic handled by smartphones overtook the traffic carried via laptops and netbooks. This is a huge development compared with the situation, say for instance, just 3 years ago. This rapid increase in demand for mobile traffic capacity is driving strong growth trends among the high-end component providers.
In fact, this growth is part of a new larger trend: all over the world, consumers are shifting from low range products to higher range items, and simultaneously seeking higher levels of user comfort. While this product shift appears to have reached maturity in the developed world, there is still plenty of unexploited potential in emerging markets. In relative values, China is leading in terms of closing the gap on developed markets.
Given the smartphone market has now entered a phase of creative destruction is now undergoing a complete overhaul, investing in well-known brands and leaders may no longer produce the desired results – at the moment many of them are really only mastering the very last part of the value chain as opposed to the entire chain. In fact, a number of traditional mobile phone providers have already lost business or closed down some or all of their operations.
Looking beyond the traditional investment
The low/mid-range smartphone market will still dominate in terms of sales volumes (i.e. absolute number of units sold) for some time; however, margins are likely to be ultra-low and the business exposed to high volatility due to the arrival of new products, most of which have been derated from the higher quality segment. This makes a subdivision between the lower and higher ranges of the market unattractive for investment purposes.
However, tangible investment potential does exist in companies supplying the key providers of the smartphone market. These are the companies that design and develop devices such as wireless chargers, portable lens modules, acoustics, connectivity chips, and/or application processors. Providers of these devices are able to scale up the technological curve and can produce their products in a cost efficient manner. Most often, their revenues are not based on volume pricing, but are royalty payments based on the sale value of the smartphone sold.
By focusing on structural shifts like higher available income, we can crystallize today’s strong investment opportunities. In this winners/losers game, where disruptive technologies are emerging every day, we have established a list of rising stars in the smartphone market.
Our favorites:
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| AAC Technologies | 2018 | Electrical components | 2.4 % | 2.36 |
| Investment case: AAC designs, develops and distributes receivers, speakers, microphones, vibrators, headsets and antennas. Its key clients include Apple, Motorola (Google), Sony, Samsung, LG Electronics, HTC, Philips, Delphi, Huwei, Lenovo, ZTE and Bosch. AAC’s top 3 clients generate over 70% of smartphone sales. It is interesting to note that Chinese sales have increased more compared with other markets, and more than 2/3 of all devices sold sit within the higher quality range. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| ARM Holding | ARM | Semiconductors | 13.4 % | 3.62 |
| Investment case: ARM Holdings is a leading licensor of the chip architecture used in mobile devices. Their products have a dominant position in the smartphone market. ARM’s revenues are based fully on intellectual property licensing. Its key customers include: Apple, Samsung, Qualcomm, Broadcom, and MediaTek. ARM is a direct beneficiary from the roll-out of higher quality standards in the smartphone industry. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Avago Technologies | AVGO | Semiconductors | 11.4 % | 3.67 |
| Investment case: Avago is a multi-product provider to the smartphone industry. Its products include radio frequency (WiFi, Bluetooth, FM, GPS) components such as filters, power amplifiers, and other related devices. More than 45% of its sales volumes were derived from the wireless business. This part of the business is expected to grow rapidly in the coming years, and by 2016 should reach close to 70% of the company’s sales volume. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Qualcomm | QCOM | Semiconductors | 10.6 % | 6.49 |
| Investment case: QCOM designs, develops and produces baseband and application processor chips used by the smartphone industry. About 60% of the applications used by today’s consumer contain a QCOM device. Because the company’s 3G technology is backward compatibile, QCOM is recognizable today as a clear winner going forward. | ||||
| Company | Ticker | Sub-Sector | Upside Potential | Sharpe (FY01) |
| Synaptics | SYNA | Technology hardware | 32.3 % | 3.13 |
| Investment case: SYNA designs, develops, and produces single-layer touch controller solutions. Its products are critical in the medium and low-end markets; therefore it has ample market opportunity in Asia and LATAM. SYNA is also seizing another opportunity by designing and developing technologies the field of fingerprint authentication. In the event there is a meaningful breakthrough in this area, the company has placed itself in a formidable position to benefit from any oncoming trend. | ||||