The list of product categories proving capable of outsized growth in this turbulent economy is short. Smartphones would certainly make the cut considering the impressive data subscription numbers Verizon (VZ - Free Analyst Report) and AT&T (T - Free Analyst Report) are reporting, as well as the skyrocketing volumes being experienced by Apple (AAPL), Motorola (MOT), and HTC Corporation. Telecom carriers and phone designers are not the only ones lining their pockets from to the global transition to smartphones, though. There is a host of auxiliary beneficiaries that are also cashing in. Specifically, the companies that make smartphone parts can help investors add exposure to the space when certain names are looking expensive or the goal is to reduce company-specific risk.
It’s true that phone designers like to diversify the suppliers they use for an entire suite of phones to avoid shortages and improve bargaining power. But when looking at individual devices, many will have only one supplier for a specific part through the course of its lifecycle.
Identifying which touchscreen or application processor has been designed into an upcoming device can be tricky since most designers are notoriously tight lipped about suppliers for competitive reasons.
Rumors about who scored a win in which device tend to permeate blogs, newspapers and tech sites long before a product’s launch. For example, a Taiwanese publication, the Commercial Times, recently reported that Infineon, whose wireless unit was recently purchased by Intel (INTC - Free Analyst Report), will not be providing the baseband chipset for the fifth generation iPhone (which is expected to be released in the summer of 2011). Instead, code division multiple access (CDMA) chipset giant Qualcomm (QCOM), is rumored to be providing the silicon, which would be a significant change considering Infineon ICs have been used in all of the prior iPhone models. If true, this strategy agrees with Apple’s widely assumed aspiration to add carrier partners that use CDMA networks like Verizon and Sprint Nextel Corporation (S). At present, AT&T (which uses the rival GSM cellular technology) is Apple’s exclusive service provider. A reason why this rumor may turn out to be false is Qualcomm does not currently offer dual mode CDMA/GSM chipsets.
Sometimes a phone designer’s secrecy methods actually work and reliable information never gets leaked. In these instances, technology investors must wait until launch day to get a peek inside the hottest new device. This is made possible by websites like iFixit, and iSuppli that are in the business of cracking open consumer electronics and swiftly reporting a breakdown of their insides. Although some full “teardown” reports cost money, the essential bill of materials is usually revealed for many new devices. Not only can this information provide a rough estimate of a smartphone’s product margin (sans software, licensing and royalty costs), but it shows precisely which companies stand to benefit from particular smartphone volume.
Taking a look at iSuppli’s teardown of Research in Motion’s (RIMM) new touchscreen device, the BlackBerry Torch 9800, it’s apparent that Marvell Technology Group (MRVL) is supplying the voice communications (baseband) chipset. Although this win should help Marvell maintain the explosive growth rate currently being enjoyed by its wireless division, more business from Research in Motion is not particularly surprising since most BlackBerry baseband chipsets were already supplied by Marvell. Any significant wins from Marvell outside of Research in Motion will likely help the budding baseband IC vendor’s reputation as an emerging player in the space.
Smartphone touchscreen leader Synaptics (SYNA) has also scored a big win in BlackBerry’s new device. This was a much needed shot in the arm for the company since it has been losing market share due to increased pricing and performance competition from rivals Cypress Semiconductor (CY) and Atmel Semiconductor (ATML). According to another teardown from iSuppli, the latter’s touchscreen controller was built into HTC’s promising Droid Incredible smartphone. We suspect that any future high-profile design wins for Synaptics, both in the smartphone and tablet PC categories, should help reinvigorate investor confidence in its stock.
Qualcomm silicon can be found all over the Droid Incredible. Specifically, its ultra-speedy 1Ghz Snapdragon IC won the coveted baseband/applications processor spot, and it also has a power management and RF Transceiver chipset built into the device. The Snapdragon Wikipedia page, has a complete list of products known to be using the chipset, which includes popular smartphones like the Samsung Galaxy S, and HTC EVO 4G. Not only are Qualcomm’s ICs found in a vast number of CDMA devices, but it receives royalties from every phone that runs on CDMA (2G) and CDMA2000 (3G) networks, making it an excellent broad-based smartphone play.
Unlike Qualcomm, RF Micro Devices (RFMD), a maker of radio frequency components, derives around half of its revenues from a single customer, Nokia (NOK). This is why the world’s largest smartphone maker has significant influence over RFMD’s performance from quarter to quarter. The company is diversifying its customer base though; it’s looking to grow its footprint in emerging markets, like China.
In a similar vein, TriQuint Semiconductor’s (TQNT) power amplifying chipsets have been found in Apple’s iPhones for years now, including the newest incarnation, the iPhone 4. According to Triquint’s 10-K, Apple’s phone manufacturer Foxconn makes up around 20% of the company’s top line. If it were not selected to provide chips for Apple’s next device, there would be serious negative repercussions for the stock.
It’s important to consider the percentage of sales coming from a specific customer, as well as the individual phones that a supplier is involved with. Also, most parts makers do not derive the entirety of sales from smartphones, so knowing how much exposure a company has to the sector is necessary.
The smartphone space certainly seems ripe for continued growth. According to Verizon, only 20% of its postpaid wireless subscriber base had smartphones at the end of the second quarter of 2010. Nielsen research expects smartphone penetration to reach 50% by the end of 2011. We believe that the functionality smartphones provide like surfing the web, playing games, using task-oriented applications, emailing, social networking, sharing personal videos and photos, playing media, etc. will soon be demanded by the overwhelming majority of cellphone users. Those looking to invest in this trend may want to consider component makers in addition to the traditional players.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.