RF Micro Devices, Inc. (RFMD)

[eastunder]

QCOM, SWKS, RFMD: Wireless Names Weak on Apparent Mobile Slowdown

July 8, 2013, 11:24 A.M. ET

http://blogs.barrons.com/techtraderdaily/2013/07/08/qcom-swks-rfmd-wireless-names-weak-on-apparent-mobile-slowdown/?mod=yahoobarrons

By Tiernan Ray

Shares of chip makers, especially the wireless variety, are weaker today as analysts ponder the impact from lower-than-expected results reported Thursday and Friday by Samsung Electronics (005930KS) and HTC (2498TW).

Mark McKechnie of Evercore Partners, reiterating an Overweight rating on shares of Qualcomm (QCOM), and a $75 price target, cuts his estimates for this year and next, “to reflect a deeper look at near- term patterns for top customers AAPL and Samsung.”

McKechnie now sees Qualcomm delivering $24.2 billion in revenue and $4.51 per share in profit this fiscal year ending in September, down from a prior $24.36 billion and $4.55. For next year, he goes to $25.95 billion and $4.85 from a prior $26.36 billion and $4.90 per share.

McKechnie’s “checks” of the supply chain reinforce the cautious view of his colleague Patrick Wang’s trip through Asia recently, and he now sees Samsung’s Galaxy S4 sales not making up for the “product transition” of Apple (AAPL) from the iPhone 5 to an expected iPhone 5S this fall:

While US and China sales of the GS4 came up strong in our checks, Europe and Korea came up light, due in part we believe to limited 4G/LTE coverage in Europe and subsidy cuts in Korea. All in we anticipate ~ 22M GS4’s sold in Q2 vs. ~ 25M built. This will be offset by the GS4 mini which will help QTL royalties but not QCT chips as we believe the mini uses BRCM (OW, $33.77, covered by Patrick Wang) […] iPhone 5S and low-cost delayed ~ a month; this is not a major issue, but impacts near-term forecasts for QCOM – our forecast assumes a mid/late September intro, and 3) solid ramp of white box China OEMs which helps QTL but not QCT.

And Citigroup’s Glen Yeung, who today wrote about weakness in the PC market, and the weak outlook for Intel (INTC), also reiterated a Buy rating on Qualcomm, and an $81 price target, while removing the stock from the firm’s Top Picks Live ranking.

Yeung thinks the Samsung report last week points to a “substantial deceleration” in high-end smartphones:

Following on from Apple’s disappointing sales of iPhone5, production of Samsung’s Galaxy S4 is poised to decline ~20% in 3Q13, just one quarter from its launch. HTC’s flagship One phone is following similar trends, with sell-in demand sustained for a mere 2 months (April/May) before a production fall-off. We attribute the lackluster sales of high-end smartphones primarily to market saturation, noting that smartphone penetration in developed markets (the primary markets for high-end phones) has reached 75%, with full saturation (85%) expected to be achieved in 2014. When adding that the marginal utility of smartphone innovation is waning precipitously, we suspect high-end smartphone sales may be facing substantial deceleration. We admit that some controversy exists over the magnitude of Apple build plans in 2H13, although we err on the side of lower estimates given the high build cost (hence high subsidies) associated with Apple’s low-cost iPhone. We have been recommending Qualcomm on the premise that after a weak 1Q13, sales/margins would improve in 2H13; we still believe this to be true, albeit with reduced conviction. While we do not revise our estimates at this time (we are already modestly below consensus for 3Q13), we remove QCOM from Citi’s Top Picks Live! list reflecting the overhang from a saturating smartphone market.

Cautious, but not as negative, this morning is D.A. Davidson‘s Aalok Shah writes that the results suggest “muted demand” for high-end smartphones:

We have been worried that the market for smartphones will see a) stretched replacement cycles and b) the next wave of growth focusing on emerging markets where price sensitivity is critical. We believe the recent results from RIMM (BBRY), HTC and now Samsung may be pointing us in the direction that the lack of new, innovative features is leading to more muted demand. Of course, to fully test this hypothesis, we need to see how the iPhone 5S does, but we remain concerned that the smartphone cycle is beginning to enter a new phase where component vendors will face significant ASP pressure as handset OEMs themselves will be forced to compete against low cost alternatives.

Still, he doesn’t view the Samsung situation as a disaster, but actually still relatively healthy:

Recently, Korean news site iNews24 released a report claiming that Samsung has shipped over 20 million Galaxy S4s. While this has not yet been validated, if true we see it as a positive for demand; it will have taken roughly two months to reach the 20 million mark versus 100 days to hit the same level with the GS3 and ten months for the GS2. We believe these numbers are based on “sell- in” not “sell-through.”

Shah, who rates RF Micro Devices (RFMD) a Buy, as well as Skyworks Solutions (SWKS) and TriQuint Semiconductor (TQNT), offers that the rumored iPhone 5S, and perhaps a rumored lower-cost iPhone, may be of benefit to his favorite names:

Our current belief is that the iPhone 5S will stand as an updated version of the iPhone 5; sharing a similar RF architecture and form. We believe most of the dollar content per device will remain the same. Although the release of a low cost iPhone is yet to be confirmed, we believe it is the most logical choice for Apple. Emerging regions offer the most potential for smartphone penetration and open a significant opportunity for a resurgence of growth. Our belief is that the device will be in the sub $200 range to compete with other players in the space. While predicting the internal design of a new device is difficult as there is no historical precedent to follow, we do see several opportunities for increasing dollar content in the device. We continue to believe RFMD may have secured a PA socket win, it’s first at Apple, and that TriQuint may have won the BAW filter content as they now have the capacity.

As far as the stocks, “We believe that a 5%-8% sequential downtick in Samsung related orders was already in our PA related names forecast.”

Qualcomm stock today is down 3 cents, or 0.6%, at $60.56; RF Micro shares are down 3 cents, or half a percent, at $5.34; TriQuint is down 16 cents, or 2%, at $7.03, and Skyworks is off 35 cents, or 1.6%, at $21.50.