Market Overview

How to Really Think About “For Chip Makers, the Next Battle is in Smartphones.”

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This morning the New York Times has an article “For Chip Makers, the Next Battle is in Smartphones.” In my view, this is hardly a new perspective as I have been saying for some time that smartphones are the new battleground and investors should be “buying the bullets, not the guns.” That is investing in key components and suppliers rather than the device companies themselves, particularly as we see the mass adoption of Google’s (Nasdaq: GOOG) Android mobile operating system as not only leveling the competitive field but also flattening device differentiation.

 The article highlights how competitive the smartphone space is becoming as well as the number of players attempting to play in that market as these devices continue to incorporate more functionality and faster connectivity. Whether its chips for WiFi, GPS, cameras, video, Bluetooth, WCDMA and eventually LTE, the point is these devices that we nearly always carry with us are incorporating more and more. This has been great for RF companies (and will continue to do so as we migrate toward 4G with more bands) and camera chip companies, but I think the next wave will be for gaming and media related chips (such as Dolby (NYSE: DLB), Nvidia (Nasdaq: NVDA) and the like and those that allow for newer ways of utilizing the device (including the ongoing migration to touch input, which bodes well for Synaptics (Nasdaq: SYNA) and Cypress Semiconductor (Nasdaq: CY), to various sensors, such as accelerometers made by Measurement Specialties (Nasdaq: MEAS), and others).

 The natural result is these devices become far more complex and power hungry as the consumer uses more of the bells and whistles. The greater the complexity and integration, the greater the need for a partner that has an integrated view and long-term road map. Moreover, the partner needs to show that it can repeatedly manufacture its products with world-class results. So while the article mentions Intel and others, I would remind that there are several well-positioned companies out there with strong competitive positions – Qualcomm (Nasdaq: QCOM), Skyworks (Nasdaq: SWKS), RF Micro Devices (Nasdaq: RFMD), and InterDigital (Nasdaq: IDCC). The article touches on ARM Holdings (Nasdaq: ARMH), which I would be looking at closer here, particularly given little US research coverage on the shares. One of the best if not the best opportunity can be found in InterDigital, which has a compelling valuation for its shares and stands to be benefit as mobile moves beyond cell phones.

 

 

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