Qualifying Quanta’s Shift to Tablets
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Quanta, the leading ODM of laptops, nabbed a pair of major contracts for tablets from Amazon (NASDAQ: AMZN) and its rival Google (NASDAQ: GOOG) for the 7” Kindle Fire and Nexus 7 earlier in the year. This comes after it was rumored that the company has been awarded an exclusive ODM production partnership with Google. This means that Quanta could become one of the leading tablet suppliers in the world with a 10 million shipment potential for 2012. The Kindle Fire is expected to ship up to 2.9 million units this fall while the Nexus 7 could sell as many as 5 million. Last month, Quanta shipped nearly 2 million second generation Kindle fire tabs. The company is growing significantly in the tablet industry as it shipped between 4 – 5 million units last year, now aiming for 100% growth. However, the entire tablet industry has a long way to go to reach Apple’s (NASDAQ: AAPL) levels of sales of the iPad.
Recently, the Quanta reported a 12% increase in net profits for the second quarter to $200 million but the second half of the year is going to be more challenging owing to weak economic conditions and the general lull and uncertainty in the market prior to the release of Microsoft’s (NASDAQ: MSFT) Windows 8. PC buyers are holding onto their budgets until October 26th, the general release date. Windows 8 is pretty much going to be the last gasp for stand-alone PC sales in an ever more mobile computing world. So, shifting production away from traditional laptops is a necessity and it’s why Quanta and its main rival Compal have been working closely with OEM’s like Dell to develop Win 8 tablets that are purpose-built.
Nabbing the Google and Amazon contracts are the key for Quanta as these are the tablets whose sales will be driven by the ecosystem each are developing. This is what will drive non iPad sales and if any one of Amazon, Google or Microsoft are successful in truly building an ecosystem that people love as much as Apple’s, and it’s not quite there yet for Android in the tablet space, then they can be the antipode to Apple like Android was in smart phones.
Android’s dominance in smart phones has now reached the point where they are ripping market share from Apple, which many refuse to admit, and this will translate into tablet sales the moment Google or Microsoft makes itself a real ecosystem competitor, of which there are doubts. Google at this point is closer than Microsoft at this point to having the whole thing up and running but lacks cohesion and internal competition from Amazon and now Samsung which is putting together its own ecosystem, likely to have a big impact in South Korea. But that dynamic will begin to change with Windows 8.
PC and Tablet demand is expected to gradually rise into the fourth quarter and beyond following the release of Windows 8 and the new products that are going to be available to consumers, such as touch-enabled hybrid devices (are they a tablet or a laptop?) will hit the market and pass the sniff test of various consumer segments. No matter who wins the tablet wars, however, Quanta stands ready to profit.
The near-term future of Quanta depends heavily on the success of Windows 8. CEO Barry Lam is hoping that there is pent up demand for Windows 8. But with Intel guiding lower revenue for the 3rd quarter and pulling 4th quarter guidance this is a good indicator of continued weakness in the PC market. Even though moving into the small cloud server business using the latest Atom SoCs from Intel is a good move to complement the move into tablets, the lion’s share of Quanta’s business depends on a smooth Win 8 launch and U.S./European consumers with enough money to have Christmas this year. Long term, however, this is a well-run company trading at a reasonable multiple, ~12, paying a 5% yield and whose margins have been steadily rising quarter to quarter. Quanta trades on the Taiwan Exchange, TT:2382, but has no active ADR in the U.S.
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