Consider This Stock to Profit From the Chinese Mobile Market
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every financial blogger/analyst likes to go back and check how his recommendations have performed, and I’m no different. Once in a while, I take a look at my CAPS picks and evaluate the leaders and the laggards. However, there are times when I’m pleasantly surprised by the performance of a few stocks.
When I recently checked out my picks, I was amazed at how fabless semiconductor company Spreadtrum Communications (NASDAQ: SPRD) has done since I made an outperform call on it four months back. The stock has gained 31% since then, even after being hammered last month after its second-quarter report came gift-wrapped with a gloomy forecast for the current quarter.
A Flashback
Spreadtrum saw a change in preference of Chinese customers, as they moved from 3G feature phones to low-cost smartphones. As a result, the company’s forecast came in behind Street estimates and the stock plunged.
However, Spreadtrum said that it was witnessing a rise in shipments of high-end smartphone products which give better margins. In addition, the company said that prices of its 2G/2.5G and 3G bundle semiconductors have reached the bottom as sales of smartphone products are picking up and the company should see better times in the future.
Count the Catalysts
While last quarter proved to be a damp squib for the company, its long-term prospects are still healthy. Spreadtrum is the leading provider of TD-SCDMA chips in China and supplies these chips to China Mobile (NYSE: CHL), the largest wireless provider in the world with more than 688 million subscribers. China Mobile is ahead of its nearest competitor, China Unicom by a huge distance and enjoys undisputed kingship in the country. It added more subscribers than its closest competitors for the month of July and it is throwing its weight behind TD-SCDMA handsets, which will benefit Spreadtrum going forward.
Going forward, Spreadtrum will find a huge opportunity in the form of China Mobile’s handset replacement market, which is almost equal to 100 million units every year. Moreover, Spreadtrum’s chips are being used by leading handset makers such as Samsung and HTC for their devices. The Galaxy S III was powered by Spreadtrum’s TD-SCDMA chip and the company recently brought K-Touch onto its client rolls for its 1GHz TD-SCDMA smartphone platform.
The 1GHz TD-SCDMA smartphone platform has been gaining traction with consumers and the company has more than 200 design wins for the platform already in its bag. Spreadtrum shipped over 1 million units of the said chip last quarter and going by the number of design wins, I believe that Spreadtrum’s top line can continue its ascent in the future.
Apart from China, Spreadtrum has also trained its eyes on the Indian cell phone market. Earlier this year, Spreadtrum penned a contract with Micromax, an Indian cell phone company, for becoming its chip supplier of choice. Micromax sells feature-rich, low-cost Android phones and tablets in the country and its phones are a huge hit amongst the budget-conscious class. Hence, this partnership should enable Spreadtrum to add more catalysts to its business for the long run.
But Keep this in Mind
While my arguments have been mostly positive so far, I’m wary of the competition that Spreadtrum would face in this burgeoning market. Earlier this year, there were concerns that RDA Microelectronics was eating into the company’s market share. However, Spreadtrum dispelled those fears with solid performances and revenue gains in the next two quarters. But going forward, the competition would get tougher.
Qualcomm (NASDAQ: QCOM) has turned its attention to the TD-SCDMA market in China, and this seems like the biggest threat for Spreadtrum. Nokia’s latest flagship, the Nokia Lumia 920, is set to be released TD-SCDMA avatar in China through China Mobile, and it is rumored that the Snapdragon S4 MSM8960 will be powering the device in the country. Hence, it remains to be seen how Spreadtrum overcomes the challenges posed by upcoming competitors.
The Bottom Line
However, Spreadtrum powers a range of devices, from low-end feature phones to flagships such as the Galaxy S III, a fact that should work in its favor. It is also expanding its presence in an emerging market such as India. Moreover, the company has a number of design wins under its belt and its 1GHz TD-SCDMA smartphone platform has gained good acceptance. The mobile handset replacement market should prove to be another driving factor for Spreadtrum’s top line.
If you’re still skeptical about how Spreadtrum would ward off stiff competition in the market, you can always add the stock to your Watchlist by clicking here for the latest news and analysis. But if your risk appetite allows, you can surely take a look at Spreadtrum if you’re looking to make an addition to your portfolio.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of China Mobile and Qualcomm. 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.
