Investing in the Future of Mobile Devices Part 1 – Hardware

This article also appears at The Motley Fool.

However, device makers are not the only beneficiaries of the ongoing smartphone and tablet boom. The companies that make the phone and tablet innards are worth looking at, and I’ve dug up the gems for you. Currently most mobile devices use processors based on technology licensed from ARM (NASDAQ: ARMH). Manufacturers like Apple and Samsung make their own ARM-based processors, like the Apple A series and the Samsung Exynos. However, most other device makers rely on processors from Qualcomm (NASDAQ: QCOM) and NVidia (NASDAQ: NVDA).

For 2013, Samsung expects to launch the first 8 core mobile processor called Exynos 5 Octa, based on ARM’s big.LITTLE technology, which pairs four low power cores with four performance cores to provide the best of both worlds–good battery life and performance–when required. Qualcomm announced their next generation of processors – Snapdragon 800 – which provide significantly better performance, including support for mind boggling image sizes like 55 megapixels, amongst other things, while consuming less power. NVidia also announced the Tegra 4, which also boasts significant performance boosts while consuming less power. So going forward we can expect more powerful phones with longer battery lives.

The CPU is not the only processor. Most of the mobile chips are systems on a chip where the GPU is also part of the same unit. The most common GPUs are based on PowerVR technology licensed from Imagination Technologies or ARM’s MALI Technology. The exceptions to this are Qualcomm, which makes their own GPUs called Adreno, based on technology acquired from AMD, and NVidia, which uses its own GeForce GPUs. They announced that the Tegra 4 has 72 GPU cores.

For now these are the big players, but there are up and coming Chinese processor manufacturers like MediaTek, who promises decent performance and cheap processors. In fact a ZTE-made phone with an 8 core processor made by MediaTek is rumored to be hitting the market in the second half of this year.

But there is one company that benefits disproportionately from the mobile boom, and that is Qualcomm, because you simply cannot make a phone without Qualcomm technologies. And with the proliferation of cellular communication into more devices like tablets, cellular hot spots, etc., it is all good for Qualcomm.

Another beneficiary of all this is TSMC (NYSE: TSM). TSMC is a contract chipmaker who actually produces processors for Qualcomm, NVidia, and potentially for Apple.

Here is a chart showing 5 year performance of the stocks mentioned in this article that are traded on the US markets. 

Other than NVidia, all of them performed admirably, especially ARM. Lets look at the income growth of these stocks.

 

ARM currently trades at a hefty P/E of 80, which may not be justified as the price has seriously outpaced income growth, especially when you compare it to Apple. Only Apple’s and Qualcomm’s profits grew faster than their stock prices, so I would recommend those two stocks. Samsung trades OTC as SSNLF, but is thinly traded. It also sports a low P/E in spite of spectacular income growth.

Stay tuned for Part 2 – software and more coverage on other device and component makers.

Disclosure: Own AAPL, INTC

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