This Stock will Lead you to the Promised Land of Mobile Growth

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Shares of Shanghai-based chipmaker Spreadtrum Communications (NASDAQ: SPRD) have gained close to 10% since the company reported earnings last week. Even though Spreadtrum posted a mixed fourth quarter, beating estimates on revenue but faltering on earnings, the stock has rallied on the back of a strong business outlook.  

Solid prospects

The company is witnessing an improvement in sales of smartphone chipsets, driven by a shift in consumer preference from feature phones to smartphones. This helped Spreadtrum report record revenue of $203 million in the previous quarter, with more than half coming from smartphones.

The company expects this momentum to continue as evident by its current quarter outlook. Spreadtrum calls for revenue of $180 million to $186 million, comfortably ahead of the $171.6 million consensus. Its product development moves are taking it in the correct direction. Shipments of smartphone chips grew from just a million units in the second quarter to more than 30 million for the entire year, and are expected to be around 80 million to 100 million this year.

The right partnerships

Spreadtrum’s relationship with key smartphone OEMs in emerging markets, especially China, its presence across different smartphone budgets, and capability of delivering efficient, low cost chips have helped it ramp up its smartphone business quickly. The company enjoys a deep relationship with China Mobile (NYSE: CHL), the world’s largest telecommunications company with more than 700 million subscribers.

Spreadtrum supplies TD-SCDMA standard chips to China Mobile, which added 7 million 3G customers in January this year. Now, China Mobile expects sales of these budget smartphones, along with other TD-SCDMA handsets, to double from last year and hit the 120 million mark this year. Since Spreadtrum commands more than half of the TD-SCDMA market in China through its relationship with China Mobile, it is well-positioned to ride smartphone growth in the region.

Moreover, higher shipments of smartphone chipsets should result in better margins given their high-yielding nature. Spreadtrum’s gross margin was under pressure last year due to a huge decline in average selling prices of 2.5G components. But since its product mix is shifting to better yielding products, better gross margin can be expected going forward.

Spreadtrum is also making its presence felt at the premium end of the smartphone spectrum. Its TD-SCDMA modems are being used by smartphone giants Samsung and HTC in China for powering high-end devices such as the Note II and the One XT. Spreadtrum’s Samsung account is gradually improving, as the Korean smartphone maker used Spreadtrum’s chipset in a low-cost smartphone and also launched a couple of feature phones globally.

Innovation counts

Spreadtrum’s focus on developing solid products is a vital cog in the company’s growth. It is focused on staying abreast with the latest technological developments and for this reason it is now focusing on its LTE chipset. The company’s first generation TD-LTE product has got off to a decent start by landing the datacard spot in China Mobile’s first 4G procurement in December last year.

China Mobile will build a TD-LTE 4G network this year, and aims to cover around 500 million customers. Thus, this early design win positions Spreadtrum for growth from the build out of the world’s largest LTE network.

Also, Spreadtrum’s latest 40nm 2.5G chip, which is aimed at feature phones in emerging markets where 3G is still not widely used, delivers high efficiency at a lower cost and size. Thus, for a big feature phone market such as India, such a chip should certainly help Spreadtrum land more design wins. Moreover, Spreadtrum is exploring new avenues and recently inked a distribution partnership with Facebook (NASDAQ: FB).

Facebook will embed its mobile app directly onto the chipset through Spreadtrum’s turnkey solution in an attempt to expand its reach in emerging markets, except China. Facebook wants to benefit as much as possible from smartphone growth in regions such as India, Southeast Asia, Africa, and Latin America and it seems to have chosen the right partner to go forward.

Spreadtrum’s expertise in budget smartphones and its presence across key customers should help Facebook achieve its objective of being right at the front when customers in these regions buy their first smartphone.  

Final words

Spreadtrum is quite confident of making the most out of the smartphone opportunity in China and emerging markets. Its cutting-edge products have helped it stay on top of its game, which is important considering the foray of chip giant Qualcomm (NASDAQ: QCOM).

Qualcomm had introduced TD-SCDMA chips last year in China, targeting both the mid and premium smartphone range from China Mobile. Moreover, Qualcomm had also scored the processor spot inside the TD-SCDMA version of the Nokia Lumia 920 this year, signaling that the company is making notable progress in the TD-SCDMA market. Hence, Spreadtrum had to live up to the challenge and it has done commendably so far.

With new products, a huge addressable market, and solid customers, Spreadtrum looks like a steal at with a trailing P/E multiple of just 9.6 times. If you’re looking to profit from smartphone growth in emerging markets, Spreadtrum looks like the perfect candidate.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of China Mobile, Facebook, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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