Texas Instruments (NASDAQ: TXN) announced back in September that it would be getting out of the smartphone chip business for good reason but what about other smartphone chip stocks like ARM Holdings plc (NASDAQ: ARMH), NVIDIA Corporation (NASDAQ:NVDA) and Spreadtrum Communications (NASDAQ: SPRD) who remain focused on the sector? To begin with Texas Instruments, it cited higher costs of patent licensing in the sector plus the dominance of both Apple and Samsung who are increasingly developing their own chips. Instead, Texas Instruments will focus on using its own chip technology and sell it to the automotive or industrial sectors and the embedded markets. As part of this shift, Texas Instruments will slash 1,700 jobs to cut expenses by about $450 million a year and exit was is viewed as a less profitable business line. That leaves plenty of players left in the smartphone and tablet chip market and here is a closer look at a couple of the more interesting ones:
ARM Holdings plc (NASDAQ: ARMH) Has Tripled for Investors Over the Past Five Years
Cambridge UK based ARM Holdings plc calls itself the world's leading semiconductor intellectual property (IP) supplier whose technology ends up in the heart of many digital electronic products. ARM Holdings plc’s business model works like this: It gets a license fee that is typically several million dollars and then a semiconductor company will design and manufacture a chip with that technology. The chip then becomes part of a digital electronic product and ARM Holdings plc receives a royalty that will typically be a percentage of the chip price for each and every chip some with the company’s technology. Usually, it takes 3 to 4 years from the time a semiconductor company signs a license until royalties are paid but many customers reuse the same technology in many different chips for a broad range of markets or application. More importantly, each new chip will start a new stream of royalty payments to ARM Holdings plc.
That strategy seems to be working because ARM Holdings plc is up 23% since the start of the year and up 308.6% over the past five years. On Wednesday, ARM Holdings plc rose 0.035 to $34.04 (ARMH has a 52 week trading range of $21.64 to $34.78 a share) for a market cap of $15.65 billion.
NVIDIA Corporation (NASDAQ: NVDA): The Future is Tablets and Mobile
NVIDIA Corporation invented the graphics processing unit (GPU) in 1999 and has since expanded into super, mobile and cloud computing as its mobile processors are now used in smartphones, tablets and auto infotainment systems. This year, NVIDIA Corporation’s phone design wins have doubled and include smartphones from HTC, Fujitsu and ZTE. The last time NVIDIA Corporation reported earnings, it beat expectations but it also forecasted that this quarter’s revenue would be missing the consensus due to slowing sales of chips for professional workstations. For that reason, NVIDIA Corporation’s CEO told analysts that the future would be in tablets and mobile. NVIDIA Corporation is also down 16.7% since the start of down 65.4% over the past five years – meaning it’s a bit of a riskier chip play until it can make the transition. On Wednesday, NVIDIA Corporation fell 2.45% to $11.54 (NVDA has a 52 week trading range of $11.53 to $16.90 a share) for a market cap of $7.15 billion.
Spreadtrum Communications (NASDAQ: SPRD) Is a Bet On China
Spreadtrum Communications is a Shanghai headquartered fabless semiconductor company that develops mobile chipset platforms for smartphones, feature phones and other consumer electronics products, supporting 2G, 3G and 4G wireless communications standards. Spreadtrum Communications is already the supplier of choice for the Samsung Galaxy S III and the HTC One X in China but competition among chip makers there is getting increasingly cutthroat. The good news is that Chinese consumers are moving to more expensive smartphones and it has a solid partnership with China Mobile (NYSE: CHL). However, Spreadtrum Communications sank last week on a profit miss and a lower outlook amid concerns that its demand for its products are peaking. That means Spreadtrum Communications will be spending more money on R&D to bring new technologies to market. Spreadtrum Communications did have a solid run-up from April until the end of October but its down 13.6% since the start of the year and up 26.7% over the past five years. On Wednesday, Spreadtrum Communications fell 5.4% to $18.04 (SPRD has a 52 week trading range of $12.63 to $29.98 a share) for a market cap of $838.09 million.
The Bottom Line. Even though Texas Instruments is exiting the smartphone chip market, chip stocks ARM Holdings plc, NVIDIA Corporation and Spreadtrum Communications could still be interesting plays for investors with a stomach for risk.