Barrron's: QCOM baseband was not in S3 international model, faces more design-outs
AMONG CHIP MAKERS, Qualcomm sells baseband chips and processors, including lucrative ones that power the latest smartphones, while Broadcom specializes in less-expensive connectivity chips and components for midrange phones. One threat to chip producers is that handset companies might seek cost savings by making more components in-house. If that happens, the costlier chips made by Qualcomm are a bigger target. Broadcom's reputation for aggressive pricing, meanwhile, should help it gain market share as handset makers become more cost-conscious.
Galaxy S3 international model already used Samsung-designed LTE, WCDMA baseband, and transceiver chips.
Only the S3 U.S version uses QCOM baseband chip.
Six years ago, 1% of the world's population had smartphones. This year, the number will hit 27%. It will continue rising for years to come, but the growth rate in sales is about to start slipping, according to a recent analysis by JPMorgan. This year, shipments will rise 37%. Next year: 17%.
That matters for investors, because smartphones have been a rich source of stock profits over the past five years. Shareholders of Apple (ticker: AAPL) have made a compounded total return of 30% a year, while investors in Samsung Electronics (005930.Korea) have made 21%. Chip makers Broadcom (BRCM) and Qualcomm (QCOM) have been good for 12% and 11% annually. Verizon Communications (VZ) compounded at 11% annually, and AT&T (T) delivered just a fraction less than the Standard & Poor's 500 index's 5%.
But as Apple's 26% slide over the past six months attests, even thriving smartphone companies can no longer be counted on for sure-thing stock profits. Best bets from here include companies that compete well on lower-cost components and hardware, like Broadcom and Samsung; OmniVision Technologies (OVTI), a camera-chip specialist with ample opportunities in midrange phones; and U.K. telecom Vodafone Group (VOD), which offers exposure to Verizon's wireless operation at a better price than Verizon shares.
HIGH-END PHONES WILL face two headwinds in coming years. The first is that the saturation level is greatest in markets that can best afford them. It will hit 72% in the U.S. this year, reckons JPMorgan. As manufacturers find fewer first-time smartphone buyers, they will have to rely more on upgrades from existing customers. The second headwind is that the number of pressing reasons for upgrades may dwindle. Displays and cameras already have reached resolutions that satisfy even finicky users. LTE, the high-speed data technology, is driving plenty of upgrades now, but it's now fast enough for video chats and movie streaming, so the next speed jump might not be as necessary. Near-field communications chips may one day allow phones to replace credit cards, but not without much more effort on the part of merchants and payment processors.
That leaves the possibility that smartphone makers will have to increasingly appeal on price as much as on features, which in turn could drive down profit margins. Wall Street predicts that Apple's operating margin will slide to 27% over the next four years, from 35% last year. Long-term investors should do fine. The cash-stuffed company trades at just 10 times projected earnings for its current fiscal year, which runs through September. It has a dividend yield of 2.3% and can afford to double its payment. But in the short term, Apple may face a choice between offering lower-price models to fuel growth or sticking with the high end to preserve margins. "We think the earnings estimates will have to come down," warns William Power, a wireless analyst at Robert W. Baird.
Samsung, at eight times this year's earnings forecast, makes much more than smartphones. But two-thirds of its operating profits come from mobile devices, and its vast manufacturing reach means it makes more of its phone innards in-house than Apple. "It can manage costs proactively," says George Greig, an investment strategist at William Blair. It also has a mix of exposure; it makes high-end phones, but also midrange ones. Growth prospects in the midrange are better, especially in emerging markets, says Power. That means that while Samsung's margins are only about half those of Apple, they also may be less at risk in the near term.