{"id":87452,"date":"2016-03-31T07:14:47","date_gmt":"2016-03-31T11:14:47","guid":{"rendered":"http:\/\/countingpips.com\/?p=87452"},"modified":"2016-03-31T07:14:47","modified_gmt":"2016-03-31T11:14:47","slug":"the-best-way-to-profit-from-smartphone-growth","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/03\/the-best-way-to-profit-from-smartphone-growth\/","title":{"rendered":"The Best Way to Profit From Smartphone Growth"},"content":{"rendered":"
March 31, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"The<\/p>\n

Get ready for a watershed moment\u2026<\/p>\n

Analysts are expecting Apple Inc.<\/strong> (AAPL<\/a>) to report its first year-over-year decline in smartphone sales.<\/p>\n

Needless to say, such a prediction has triggered breathless media pronouncements about the \u201cdeath of the smartphone boom.\u201d<\/p>\n

A Bloomberg Gadfly<\/em> column in late January entitled \u201dSmartphones\u2019 Death Knell\u201d serves as a prime example.<\/p>\n

But don\u2019t be fooled.<\/p>

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While growth might be slowing, the overall boom is far from over.<\/p>\n

On the contrary, actually.<\/p>\n

If we dig into the data, there\u2019s one sub-sector of this industry that I\u2019ve highlighted before where growth is accelerating<\/a>, not decelerating.<\/p>\n

As such, it remains a prime investment opportunity.<\/p>\n

Far From Over<\/h2>\n

If you think the shift to mobile devices is over, think again.<\/p>\n

The truth is, we\u2019re actually only about halfway through the transition.<\/p>\n

As you can see in the chart from Andreessen Horowitz\u2019s Benedict Evans below, around 2.5 billion more smartphones will be sold between now and 2020.<\/p>\n

\"The<\/p>\n

What does this equate to in dollar terms?<\/p>\n

In 2015, IDC estimated that the average selling price for a smartphone was $293.61. So with that in mind, we\u2019re talking about another $734 billion in sales.<\/p>\n

To put that into perspective, consider that Apple sold $155.5 billion worth of iPhones over the last 12 months.<\/p>\n

So the best way to profit from this growth is obvious, right? Buy Apple and Samsung.<\/p>\n

Well, of the dozens of handset manufacturers, they\u2019re the only two that make any money.<\/p>\n

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 \u2013 12.4%.<\/p>\n

\"Killing<\/p>\n

Now, while you can\u2019t go far wrong by investing in Apple, I do believe there\u2019s a higher-reward way to profit from the enduring smartphone boom.<\/p>\n

The Smarter Path to Smartphone Profits<\/h2>\n

Bloomberg Gadfly<\/em> columnist David Fickling (almost) led investors to the water, so to speak.<\/p>\n

He notes: \u201cSmartphones increasingly resemble boxes of commodity components\u2026 The real competitive advantage is being captured by the companies that can produce the best semiconductors.\u201d<\/p>\n

The advantage is reflected in the numbers, too.<\/p>\n

As Fickling points out, the average smartphone chipmaker boasts operating margins of 17.6%, compared to only 4.4% for handset makers.<\/p>\n

So it\u2019s clear\u2026 we want to buy chips, not handsets. But what type of chips?<\/p>\n

Survey Says: \u201cBuy Chips\u201d<\/h2>\n

As I shared in March, in order to meet exploding mobile data demands, more radio frequencies<\/a> (RF) need to be supported in each smartphone.<\/p>\n

In turn, it means the total dollar amount of RF chips in smartphones keeps rising.<\/p>\n

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. <\/strong>(QRVO<\/a>).<\/p>\n

That\u2019s a staggering 400% increase<\/em> in content, compared to a standard 3G smartphone.<\/p>\n

And thanks to trends like carrier aggregation, RF complexity and content is only going to keep rising.<\/p>\n

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%.<\/p>\n

Obviously, growth in premium RF content stands to be much higher.<\/p>\n

The divergent paths should serve as a flashing buy signal to us.<\/p>\n

Or as I previously wrote, \u201cVery few investors think about what it takes on the inside<\/em> of mobile phones to enable them to work properly. But they should, because it\u2019s an incredibly lucrative business for the companies behind such technology.\u201d<\/p>\n

So where are the profits?<\/p>\n

Take Your Pick<\/h2>\n

There are three major, publicly traded RF chipmakers \u2013 Broadcom Limited <\/strong>(AVGO<\/a>), Skyworks Solutions Inc. <\/strong>(SWKS<\/a>), and Qorvo.<\/p>\n

And now, compelled by the rapid growth and robust margins, QUALCOMM Inc. <\/strong>(QCOM<\/a>) is also entering the business. In January, the company announced a $3 billion joint venture with Japan\u2019s TDK, a leading Asian supplier of RF chips.<\/p>\n

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.<\/p>\n

I encourage you to review their latest quarterly conference call transcripts. Doing so underscores the industry-wide tailwinds.<\/p>\n

But if you don\u2019t have the time, here are two prime examples (emphasis mine):<\/p>\n