Smartphones Will Be Big Catalysts for These 2 Chip Stocks

Markets Motley Fool

The smartphone market isn't going to run out of momentum anytime soon, thanks to plenty of room for growth in emerging markets such as China and India. IDC estimates that smartphone shipments totaled 1.47 billion units in 2016, and could grow further to hit 1.77 billion units by 2021. A simple way to take advantage of this potential growth is through chipmakers who supply the necessary components to make these devices work.

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Skyworks Solutions (NASDAQ: SWKS) and Cirrus Logic (NASDAQ: CRUS) are two such semiconductor specialists that are well-placed to benefit from the secular growth in smartphones. Let's see how.

The case for Skyworks

Skyworks Solutions could be one of the best bets to benefit from smartphones, as it is supplying its wares to all the key OEMs (original equipment manufacturers). The chipmaker counts Apple (NASDAQ: AAPL), Samsung, and Chinese smartphone maker Huawei among its client list, and all of them have been increasingly using Skyworks' chips in their devices.

Apple, for instance, is Skyworks' largest customer with around 40% of its revenue, which is great news for investors: Cupertino's iPhone shipments are expected to rise from 217 million units in the current fiscal year (which ends in September) to 246 million in the next one. But at the same time, Skyworks could generate more revenue from each unit of the iPhone, as it may be supplying more radio-frequency chips for next-generation devices.

Though Skyworks management has been coy about content-share gains at its largest customer, CEO Liam Griffin did drop a clue. "We refresh our product line in ways that make sense; we have a technology reach that's expanded," Griffin said, in response to an analyst's question about the company's position in Apple's upcoming iPhones.

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Skyworks may enjoy windfall gains from the next-gen iPhones, thanks to higher content and stronger shipments. More importantly, Apple should be a long-term catalyst for Skyworks -- iPhone shipments could increase from 226 million units in the calendar year 2017 to almost 259 million units in 2021, as per IDC.

Assuming Skyworks keeps its content share in iPhones consistent, it will keep getting big business from Cupertino for a long time. However, the chipmaker isn't content just being an Apple supplier; it is aggressively pursuing opportunities at Chinese smartphone OEMs.

This isn't surprising, as Chinese smartphone brands hold 48% market share globally, according to data from Counterpoint Research. The likes of Huawei, OPPO, Vivo, and Xiaomi have managed to increase their sales substantially beyond mainland China, outpacing the growth rate of the overall smartphone market.

Not surprisingly, Skyworks launched a China-focused LTE chip platform earlier this year, which has helped it score lucrative design wins at Huawei. For instance, Skyworks supplied $9 to $10 worth of content to Huawei's flagship P9 smartphone. This bodes well for the chipmaker: Huawei is expected to ship close to 150 million smartphones in 2017, while its aggressive focus on displacing Apple in the vendor rankings means that its shipment figures could keep rising.

More importantly, Huawei has started focusing on the high-end smartphone market, so Skyworks should be able to expand its dollar content at this customer along with volume gains.

The case for Cirrus Logic

Cirrus Logic is trying to go the Skyworks route since it currently depends too much on Apple. The audio-chip specialist got 76% of its revenue from the iPhone maker during the recently reported first quarter, but this is down from 85% during the third quarter of the previous fiscal year.

There's no denying that the ramp-up of iPhone production will be good news for Cirrus Logic's fortunes, but mid-tier smartphones could present a bigger opportunity in the long run. Earlier this year, Cirrus Logic's CEO Jason Rhode pointed out that increasing the company's presence in mid-tier smartphones is a priority, as these devices are gradually incorporating richer features and functionality.

More specifically, Cirrus Logic believes that mid-range Android smartphones will start deploying hi-fi digital-to-analog converters, smart audio codecs, and amplifiers in the current fiscal year. The good news is that Cirrus has already started deploying some of its chips into this area, both at existing clients and at new ones.

This could be a big deal for the company in the long run, as mid-tier smartphone sales have started accounting for a greater portion of the overall market. At the end of 2015, these smartphones priced in the range of $200 to $399 made up 22% of the total market, but in 2016, their market share increased to 25%.

The jump in mid-tier smartphone sales can be attributed to the OEMs' strategy of packing flagship features into budget devices to capture a greater share of the market. In fact, the "affordable premium" smartphone segment, with a price band of $300 to $399, was the fastest-growing area during the first quarter of the year.

The trend will continue as sales of such smartphones in emerging markets gain momentum. Not surprisingly, the average selling price of Android smartphones is expected to drop from $215 in the first quarter of 2016 to $198 in 2021, as more mid-tier devices hit the market.

Cirrus Logic, therefore, is making a smart move by entering mid-tier smartphones. It could enjoy both volume growth and new chip content as device makers add premium features to these devices.

The Foolish takeaway

Skyworks and Cirrus Logic are likely to benefit from higher iPhone builds, but at the same time, both companies have set their sights on the greater opportunity in the smartphone space. Skyworks has already made progress by partnering with Huawei, while Cirrus is just getting started by focusing on the emerging opportunity in mid-tier devices -- which should set up both companies for substantial long-term gains, given the secular growth available in smartphones.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: short November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool recommends Cirrus Logic. The Motley Fool has a disclosure policy.