- While the growth of smartphones on the high-end is decelerating, the low-end in China and the emerging markets continue to see strong growth.
- The outlook for communications infrastructure seems to have improved.
- The ‘Internet of Things’ may be more evolutionary than revolutionary for most companies.
Mobile World Congress (MWC) is the industry’s annual trade show, which was held this year during the last week of February in Barcelona, Spain. As the telecommunications industry’s largest trade show, there are more than 85,000 attendees and seemingly as many ideas. Here are a few takeaways from the show this year.
Two key themes in smartphones stood out at the show. First, Samsung presented its newest smartphone, the Galaxy S5, and the general consensus from many investors coming out of MWC was how evolutionary and unexciting the new phone is. For many investors, this confirmed that the smartphone market is saturated and that there are no investable themes in mobile.
To some extent, these conclusions have validity given that there is clear deceleration in the growth of high-end smartphones, such as the iPhone and the Galaxy S. However, many investors are using too broad of a brush for the space and are missing a number of investment opportunities. For example, while the high-end is decelerating, the low-end in China and the emerging markets continue to see strong growth. As consumers in these areas trade up from voice-only feature phones to 3G/4G data-centric smartphones, the dollar amount of components per phone continues to rise. For example, radio frequency (RF) components in 2G voice phones is < $1; RF components in an emerging markets long-term evolution (LTE) smartphone can be as much as $3. As a result, despite the deceleration in the growth rate of the high-end of the smartphone market, component vendors into smartphones continue to see a growth tailwind from the trade-up in the low-end, which benefits components such as cellular baseband vendors, RF component vendors and mobile memory makers, such as Micron.
The second major smartphone-related theme from the show was component vendor consolidation. RF component vendors RFMD and Triquint announced a merger, which will rationalize the number of RF vendors from four to three. For many investors, consolidation implies more favorable competitive dynamics and a positive re-rating for the stocks. Over the next few years, the next smartphone-related space to see consolidation will likely be cellular baseband vendors. Today, there are six vendors in this space and, in our view, there will likely be three over the long-term.
Due to the rapid growth of mobile data traffic, investors seem to be consistently excited about the prospects of strong growth in the demand for communications infrastructure. Unfortunately, that demand has been lumpy at best and, more often than not, relatively disappointing. The reasons for the weaker-than-expected equipment demand over the last few years have included: a decline in demand generation equipment offsetting the increase in demand for next generation equipment (e.g. decline in 3G equipment offsetting growth in demand for LTE equipment), slow government approval for time division (TD)-LTE licensees in China and limited ability of carriers to monetize the growth in data traffic.
At MWC this year, the outlook seems to have improved. Within China, China Mobile appears set to make significant investments to upgrade from its 3G network to its LTE network, and its competitor China Telecom looks set to do the same starting in the second half of 2014. In addition, 3G Investments in India appear strong and LTE investments by carriers in Europe also appear likely. While the improved outlook we are hearing about could turn out to be just another head fake, the demand appears real and at minimum should at least meet investor expectations, if not beat those expectations to some degree, in our opinion.
Internet of Things (IoT)
While IoT was not a core theme of the show, there were a number of vendors demonstrating wearables, such as Samsung Gear. Cisco Systems reiterated its long-held and provocative view that IoT is a 5 to10x bigger opportunity that the original Internet. From a use case perspective, IoT can be bucketed into wearables, connected home & auto and industrial automation. From a technology perspective on the component side, the three key technologies are connectivity (Wifi, Bluetooth, Zigbee, Ethernet), sensors (motion, temp, positioning) and processing, with connectivity being the most important, in our view. As an investable theme for the overall component space, IoT may be more evolutionary than revolutionary for most companies.
The securities listed are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable.