Spreadtrum Communications: An Emerging Markets Mobile Growth Play
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fabless semiconductor maker Spreadtrum Communications (NASDAQ: SPRD) edged ahead of the market’s top line expectations but beat handsomely the bottom line in the first quarter. The company sprung a 46% surprise on adjusted earnings per share and backed it up with a positive outlook, sending its shares up 15%.
Flying against the wind
Spreadtrum’s stock was hammered last month when Chardan Capital Markets recommended the company’s competitor, RDA Microelectronics (NASDAQ: RDA), as a buy. The analysts were of the opinion that RDA Microelectronics was trimming down Spreadtrum’s market share through competitive pricing. However, a 17.5% leap in revenue in the quarter to $161 million from the year-ago period and a solid guidance issued by the company was enough to prove skeptics wrong.
The revenue jump was driven by a 39% increase in sales of its 2G/2.5G baseband and radio frequency (RF) chips along with a 105% jump in sales of its 3G chips. The way I see it, this development is an indicator of things to come since the 3G market in China is expected to grow rapidly.
The road ahead looks really bright
The fact that Spreadtrum counts China Mobile (NYSE: CHL), China’s and the world’s largest wireless provider, as its client gives me more reasons to be bullish on the stock. Spreadtrum commanded more than half of the TD-SCDMA market last year through its partnership with China Mobile. Although the company didn’t give out any such figure this time, but the growth it exhibited in the quarter and the guidance it issued point towards the fact that its relationship with the telecom giant has grown over time.
But the halo around the company’s future isn’t limited to only China Mobile. Spreadtrum has won around 200 designs for its 1GHz TD-SCDMA chips for use on the Android platform, a move which will drive its growth in the current quarter. Importantly, the chip has been selected by Samsung for use in the TD-SCDMA version of the Samsung GALAXY Note for sale through China Mobile.
The Indian Connection
The company is also spreading its wings in India and other emerging markets. It has penned a deal worth $10 million with Micromax Informatics Limited, an Indian company, and will become its favored supplier of chips. Micromax is the twelfth largest cell phone maker in the world, shipping around 16 million units every year. Its primary focus is on supplying affordable phones to consumers in emerging markets. This deal will probably help Spreadtrum gain more traction in the second most populous nation in the world. Thus with most of China in its bag, the company is training its eyes on the burgeoning cell phone market in India. This is undoubtedly a smart move since feature-rich, value-for-money phones find a huge number of takers in the country and Micromax is a handset maker of that ilk.
The takeaway
With opportunities in fast-growing markets ahead of it and having the right type of partners to go with, Spreadtrum is a stock which certainly deserves a look. It might have taken a beating so far this year but its prospects tell me that it is quite capable of scripting a turnaround.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
