Get ready for a watershed moment…
Analysts are expecting Apple Inc. (AAPL) to report its first year-over-year decline in smartphone sales.
Needless to say, such a prediction has triggered breathless media pronouncements about the “death of the smartphone boom.”
A Bloomberg Gadfly column in late January entitled ”Smartphones’ Death Knell” serves as a prime example.
But don’t be fooled.
While growth might be slowing, the overall boom is far from over.
On the contrary, actually.
If we dig into the data, there’s one sub-sector of this industry that I’ve highlighted before where growth is accelerating, not decelerating.
As such, it remains a prime investment opportunity.
Far From Over
If you think the shift to mobile devices is over, think again.
The truth is, we’re actually only about halfway through the transition.
As you can see in the chart from Andreessen Horowitz’s Benedict Evans below, around 2.5 billion more smartphones will be sold between now and 2020.
What does this equate to in dollar terms?
In 2015, IDC estimated that the average selling price for a smartphone was $293.61. So with that in mind, we’re talking about another $734 billion in sales.
To put that into perspective, consider that Apple sold $155.5 billion worth of iPhones over the last 12 months.
So the best way to profit from this growth is obvious, right? Buy Apple and Samsung.
Well, of the dozens of handset manufacturers, they’re the only two that make any money.
In the last quarter, for example, Apple earned 88.3% of global operating income in the industry. Meanwhile, Samsung earned a respectable, albeit considerably smaller amount – 12.4%.
Now, while you can’t go wrong by investing in Apple, I do believe there’s a higher-reward way to profit from the enduring smartphone boom.
The Smarter Path to Smartphone Profits
Bloomberg Gadfly columnist David Fickling (almost) led investors to the water, so to speak.
He notes: “Smartphones increasingly resemble boxes of commodity components… The real competitive advantage is being captured by the companies that can produce the best semiconductors.”
The advantage is reflected in the numbers, too.
As Fickling points out, the average smartphone chipmaker boasts operating margins of 17.6%, compared to only 4.4% for handset makers.
So it’s clear… we want to buy chips, not handsets. But what type of chips?
Survey Says: “Buy RF Chips”
As I shared in March, in order to meet exploding mobile data demands, more radio frequencies (RF) need to be supported in each smartphone.
In turn, it means the total dollar amount of RF chips in smartphones keeps rising.
Consider: The latest version of premium 4G phones have an average of $16.25 in RF content, according to a recent presentation by Qorvo Inc. (QRVO).
That’s a staggering 400% increase in content, compared to a standard 3G smartphone.
And thanks to trends like carrier aggregation, RF complexity and content is only going to keep rising.
Add it all up, and while smartphone growth is expected to dip into the single digits in the coming years, RF content is expected to grow at a compound annual rate of 15%.
Obviously, growth in premium RF content stands to be much higher.
The divergent paths should serve as a flashing buy signal to us.
Or as I previously wrote, “Very few investors think about what it takes on the inside of mobile phones to enable them to work properly. But they should, because it’s an incredibly lucrative business for the companies behind such technology.”
So where are the profits?
Take Your Pick
And now, compelled by the rapid growth and robust margins, QUALCOMM Inc. (QCOM) is also entering the business. In January, the company announced a $3 billion joint venture with Japan’s TDK, a leading Asian supplier of RF chips.
Time will tell if this tie-up leads to significant market traction and, therefore, warrants investment consideration. But in the meantime, investors should focus on the top three chipmakers.
I encourage you to review their latest quarterly conference call transcripts. Doing so underscores the industry-wide tailwinds.
But if you don’t have the time, here are two prime examples (emphasis mine):
- “First, demand for wireless data continues to skyrocket, with no end in sight, driven by the adoption of streaming media and cloud-based services across consumer and enterprise applications… Secondly, growing data consumption requires dramatically higher levels of analog performance at the semiconductor level… The end result is greater addressable content per device and TAM growth well in excess of the semiconductor sector.”
– Skyworks CEO David Aldrich
- “In mobile, the increasing global demand for broadband data and always-on connectivity continues to trigger a dramatic increase in the requirements for mobile networks and connected devices… The RF suppliers with today’s best performing, most tightly integrated solutions are at the forefront of the most challenging and most lucrative customer designs this year, next year, and extending well into 2018.”
– Qorvo President and CEO Robert A. Bruggeworth
My top pick? Skyworks.
The reasons are simple. It’s cheap (a forward price-to-earnings ratio of 11.5) and boasts double-digit earnings growth projections.
If you’re interested in higher-risk, higher-reward ways to play the boom, there are several small and micro-cap options. I personally own one such company, but our editorial policies prohibit me from mentioning it here.
However, I’m carefully tracking others, including Akoustis Technologies Inc. (AKTS). But please note that the company is still in the development stage.
Whether you opt for a mature, large cap, more diversified RF chipmaker or an “up-and-comer” doesn’t matter. Just make sure you have exposure to the trend!
Ahead of the tape,