As wireless carriers around the world ramp up their networks in preparation for smartphones with faster smartphone processors, analysts look to chipmakers including Marvell Technology and ARM Holdings as some of the key beneficiaries.
Many on Wall Street have said that upgrading wireless networks to LTE or similar high-speed/high-capacity standards will spur customers to buy new smartphones. That would, in turn, spur sales growth at chipmakers.
The opportunity for chipmakers like Marvell Technology (MRVL) could “prove to be better than expected” this year, especially in countries like China where mobile growth is astronomical, according to Doug Freedman, analysts at RBC Capital Markets.
Beyond Smartphone Demand
It’s not just smartphones that are requiring computer chips these days, notes William Blair analyst Anil Doradla.
Companies such as Google (GOOG) eye connected devices and appliances for homes and cars — a trend sometimes called the Internet of things, or IOT.
All of those devices — and there are expected to be many — will need chips, too.
That might be good news for Cambridge, England-based ARM Holdings (ARMH), which is leaning hard on IOT-capable designs.
“On the IOT front, we believe the next several years will witness significant proliferation of sensors across all spheres of our lives, resulting in greater efficiencies in our home and work lives,” wrote Doradla in a March research note.
Internet-connected chips are being built all over — from kitchen scales to thermostats made by Nest, a company that Google bought for $3.2 billion in January.
There are two general types of chipmakers — those that fabricate their chips and those that are fabless, meaning they design chips and outsource the costly manufacturing process. Both segments have shown recent strength.
IBD’s fabless semiconductors group, which includes Ambarella (AMBA) and Cavium (CAVM), climbed to No. 21 this week among the 197 industry groups tracked by IBD, up from a No. 52 ranking at the start of the year.
The chip manufacturers group, meanwhile, climbed to No. 25, up from No. 162. That list includes big names such as Intel (INTC), Taiwan Semiconductor (TSM) and Micron Technology (MU).
Sales Growing, But More Slowly
Chip sales got off to a strong start for the year, but might be set to start tapping on the brakes.
The Semiconductor Industry Association said in mid-March that global chip sales jumped 8.8% in January to a record $26.28 billion.
Global chip sales in 2013 rose 4.8% to $305.6 billion, outpacing SIA’s expectations for 2.1% growth.
A nonprofit industry tracker, World Semiconductor Trade Statistics, expects growth of chip sales in 2014 to slow to 4.1%, $317 billion. It sees further slowing, to 3.4% growth ($328 billion) in 2015, according to a press release.
Much of that growth is expected to be in the car market, where new vehicles are rapidly being outfitted with in-dashboard computers, says WSTS.
Semiconductors may be making their way into more types of products, but cracks exist in the industry, according to Ascendiant Capital Markets analyst Cody Acree, who initiated coverage on Intel with a sell rating on March 10.
IDC and Gartner have “published estimates pointing to an approximate 10% PC decline … the largest in the industry’s history,” wrote Acree.
Smartphone shipments, meanwhile, topped 1 billion for the first time, in 2013, according to IDC. Sales jumped 38.4% from the year earlier.
Race To The Bottom?
Much of that smartphone growth was fueled by low-cost phones running Google Android software — many of which retail for less than $150 in China and India, says IDC.
Chipmakers have targeted those low-cost markets with new chips, like Nvidia’s (NVDA) Tegra 4i, a low-cost LTE chip introduced in February 2013.
“Tegra 4 has shipped in tons of smartphones in China,” Nvidia CFO Colette Kress told analysts in February.
Tegra segment sales ratcheted up to $131 million in Q4, up 18% from Q3, says Cress.
But those chips have a lower profit margin than traditional chips, meaning Nvidia didn’t hit its Q4 gross-margin outlook.
On Deck: The IOT Megatrend
Analysts are watching developing countries throughout Africa and Asia for signs that smartphone growth is continuing.
Because Internet users in such countries mostly can’t afford desktop or laptop computers, they use smartphones as their primary connected device.
Mobile Internet users in China hit 500 million at the end of 2013. That represented 81% of all of the country’s Internet users, up from 66.2% a year earlier, according to data from the China Internet Network Information Center, a state-run entity.
Local research firm Canalys expects 95% of Internet use in China to be via mobile devices by 2017.
Because of that growth, wireless carriers are building LTE networks, says Morgan Stanley analyst Joseph Moore.
Chipmakers such as Cavium are expected to see the benefits of those build-outs in late 2014 through 2015.
“Longer term, we believe that small-cell LTE infrastructure will be a growth theme for CAVM,” wrote Moore.
The bottom line for many on Wall Street seems to be that smartphone growth and the growth of connected devices are going to fuel growth for chipmakers.
At ARM Holdings, the company has started building some Internet of Things support into its chips.
As many as 100 billion connected products are expected to ship in the next decade, and ARM is the “best play on the IOT megatrend,” wrote analyst Doradla.
That company is “expecting to the market to reach a mere 3 billion units by 2018, which we believe is highly conservative,” said Doradla.
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