Speakers Activate Stocks -- WSJ

By Gregor Stuart Hunter Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 25, 2017).

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For years, tech stocks in Asia have risen and fallen by the release cycles of Apple Inc.'s iPhone as component producers gear up to supply new versions. Now, a new type of product is creating a similar buzz among investors in the region.

Smart speakers -- voice-activated, internet-connected devices such as Amazon.com Inc.'s Echo -- have scored with consumers by allowing them to make purchases without picking up a phone thanks to onboard assistants like Amazon's Alexa.

Apple, Alphabet Inc.'s Google, Samsung Electronics Co. and several Chinese competitors have followed Amazon into the market in search of the next big trend in consumer electronics. That has added to demand for components like semiconductors, speaker modules and motion sensors coming from Asian suppliers, contributing to a supply crunch and lifting margins for those producers.

Smart speakers are just taking off, but will have a "smartphone moment" at which point they become ubiquitous, said Oliver Lee, investment director at Old Mutual Global Investors, which manages $37 billion in assets.

Sales are growing quickly. Some 10.7 million Amazon customers in the U.S. owned an Echo device at the end of the first quarter, up from three million a year earlier, according to research firm Consumer Intelligence Research Partners LLC.

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The Echo was first offered to Amazon Prime customers in the U.S. in 2014. Last year, the U.S. company began selling its speakers in Europe.

Market-research firm Gartner estimates spending on smart speakers will total $3.5 billion globally by 2021, compared with $360 million in 2015.

"Amazon Echo, Google Home and Apple HomePod are going to be much more prevalent in the home over the next three to four years," Mr. Lee said. "We're in the early stage for this rollout, and we don't think it's fully priced into the stocks."

Asian tech companies are racing to grab market share. Alibaba Group Holding Ltd. has released a digital assistant similar to Amazon's Echo, while Samsung is also developing a voice-activated speaker. Baidu Inc. launched a home-control robot called "Little Fish" in April and Alibaba e-commerce rival JD.com Inc. sells a smart speaker in the Chinese market called Dingdong.

The sudden popularity of these devices has been a boon to component suppliers such as Taiwan's WIN Semiconductors Corp., whose share price has almost doubled this year. Investors are piling into the company, which trades at a discount to highflying tech stocks like Amazon. Data from FactSet show $104 million in new investment from fund managers including Fidelity International during the last six months.

Old Mutual has snapped up shares in Hong Kong-listed Hua Hong Semiconductor Ltd., whose stock has risen 20% this year.

Fund managers including AllianceBernstein LP and Guggenheim Investments have increased their holdings in the company by a total of $82 million in the last six months, according to FactSet.

Another beneficiary is Primax Electronics Ltd., a maker of speaker modules for Amazon and Google devices whose shares are up 59% this year. Fund managers, including Lazard Asset Management and J.O. Hambro Capital Management Ltd., have invested $95 million in Primax shares this year, according to FactSet.

The component makers' shares are a comparative bargain.

Amazon trades with a multiple of 147 times next year's estimated earnings, Google parent Alphabet at 25 times next year's earnings, Alibaba at 31 times and Baidu at 28 times. Meanwhile, WIN Semiconductors trades at a multiple of 18.4, Primax at 12.2 times and Hua Hong at 9.8.

Still, smart speakers are in their infancy. In contrast, the smartphone industry is expected to generate spending of $400 billion this year, a decade after Steve Jobs introduced the iPhone. In the first quarter, Samsung shipped 79 million smartphones while Apple sold 52 million iPhones, according to Gartner.

But the technology powering the voice-commanded assistants like Alexa represents a rich opportunity for investors.

Demand for smart speakers is expected to help spur what Nomura describes as an "unprecedented super cycle" for semiconductors, in particular dynamic random access memory, known as DRAM. The chips are used for servers powering cloud computing and artificial intelligence, which underpins speech-recognition software.

Stocks expected to benefit from the added demand include Samsung Electronics -- which Nomura expects will surpass Intel as the biggest semiconductor company -- and South Korean rival SK Hynix Inc., shares of which have more than doubled in value during the past year.

Fund managers say the rally has further to go. Hardware makers in South Korea and Taiwan that sell components for these products are in a strong position to generate higher margins for the foreseeable future, said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners, which manages EUR580 billion.

The MSCI Korea index is up 21% this year, while MSCI Taiwan has gained 13%. Both are ahead of the S&P 500, which has gained 9.5%.

"There's quite a high barrier to entry," Mr. Kwong said. "A lot of Chinese companies are trying to move into this space, and it'll take a long time for them to develop the required technology."

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com

(END) Dow Jones Newswires

August 25, 2017 02:47 ET (06:47 GMT)