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

A Techie’s Guide To The Future Of Tech Stocks: Intel

This article also appeared at The Motley Fool.

This is a part of a series of articles that covers the biggest names in Technology from a dual perspective of an advanced consumer and an investor. So far I have covered Google, Microsoft, Apple and Amazon. Next up is Intel (NASDAQ: INTC).

Intel’s stock has been trading in the same range for a long time now. It feels like another stock that is just stuck. No matter what Intel does, the stock seems to be not particularly happy. Intel has been steadily decreasing float and increasing earnings per share and dividends. In fact it is one of the best Technology dividend payers with the dividend currently sitting at 4.4%. Personally any time the stock hit $19 in the last few years, I considered it a good value, even more so now with the stellar dividend.

 

 

 

Note the growing earnings especially in the last two years and the steadily increasing yield. Normally for a company doing well, the expectation would be for the yield to stay constant as the stock price rises with the rising dividend. So what is wrong here? The answer is simple. It is the perception that mobile devices are the future and Intel is losing, if not has already lost that war. Today’s mobile processors are all based on technology licensed from Arm Holdings (NASDAQ: ARMH), such as the Qualcomm Snapdragon, Samsung Exynos, NVIDIA Tegra, Apple A series, etc.

Compared to Intel’s processors, these are a lot lower power and with the current crop of quad core processors, they approach Intel in performance. Intel’s foray into mobile — the Medfield was mostly a flop with few phones with limited launches. However Intel’s single core Medfield processor was competitive in both performance and battery life with dual core Arm processors.

Things can only get better from this point. The next generation of processors from Intel will be more widespread and more competitive. The latest Windows tablets use Intel’s Clover Trail (next generation after Medfield) and unlike ARM processors are capable of running the full Windows 8, not Windows RT. It may take one or two more generations for Intel to spread processors into all kinds of phones and tablets running Android, but Intel will make it there.

Also, most tablet users will tell you that tablets do most things they need to do and they rarely need to fire up the old PC. People treat this as a negative for Intel. But the key words in that statement are most and rarely. This is where Intel has the opportunity to shine with Ultrabooks, Windows tablets and other future tablets — a competitively priced lightweight machine that can replace both the PC and the old tablet.

An article about Intel needs a mention of AMD (NYSE: AMD) just because AMD competes in the same space. However AMD is in fairly bad shape and the real competition is perceived to be shifting to cheap mobile devices and phones where Intel is better positioned than AMD. AMD does plan to build ARM based CPUs in 2014, but by that time Intel’s own CPUs should provide enough competition. Intel has the advantage of being vertically integrated and doing everything from designing to building their own CPUs that nobody has since AMD spun off its foundries.

One more reason to buy Intel is provided by Intel themselves. They are constantly buying back their own stock. In fact Intel is known to borrow money to buy back stock. I won’t argue that a lot of companies don’t buy back stock at the right time. But in the case of Intel, the stock has been undervalued for a while. In fact, the cost of borrowing to buy back stock for Intel is less than the dividend and the buybacks are reducing float. They are not just bought back and then handed to employees. The second reason to buy Intel is that Intel outspends everybody in R&D. That has not always worked (see Nokia) but in Intel’s case where semiconductor manufacturing is a very expensive proposition, it will work in their favor.

So to summarize, before PC sales decline enough to affect Intel in a significant way, Intel will be competitive in the mobile space. Also the stock pays a great growing dividend supported by a growing income. Buying on drops to or under $20 is a great way to get into Intel.

Since writing this article Intel announced future plans at CES including the next generation after Clover Trail, called Bay Trail, and Android support. More details here