MKM Partners

We are previewing radio-frequency names RF Micro Devices and Skyworks Solutions, reporting this Wednesday and Nov. 6, respectively.

Near term radio-frequency (RF) fundamentals will be driven by sell-through and relative exposure across Apple (ticker: AAPL), China Inc. and Samsung [of South Korea]. Apple exposure is most favorable as evidenced by Skyworks' ( SWKS) preannouncement. China Inc. exposure is turning more favorable -- November and December sales should pick up as better models continue to launch in the face of weak sell-through/inventory build in prior months (original equipment manufacturers (OEMs) don't wait for digestion of stale inventory). Samsung share loss may continue, on a squeeze at both ends by large-screen iPhone 6 and [Google ( GOOGL)] Android competition tarnishing brand perception and loyalty at the low-end.

While both RF Micro ( RFMD) and Skyworks benefit from the "golden age" of RF, at the moment we prefer Skyworks on present exposure and content trends.

While some are calling the bottom, we think there is room for further loss of Samsung market share given pressures at each end of the product tier. At the low end, we don't think customers are particularly brand-loyal; brand status and perception is tarnished by share loss, and customers may readily switch to increasingly price- and feature-attractive Android alternatives from China Inc. In China, a rapid collapse of perception in the Samsung brand could result in share carved up by China OEMs. Samsung likely impacts RF Micro more than Skyworks (25% and 15% customer in latest respective 10-k filings).

Our proprietary consumer-device survey (done in conjunction with MKM's Intelligence Community team), suggests that Samsung will return to seasonal strength early next year. There are a greater number of Samsung smartphone owners year-over-year (38% now versus 25% last year), and near-purchase intentions for Samsung have markedly increased (38% versus 28%). In fact, near-term purchase intentions are leaning slightly more towards Samsung rather than Apple this year (38% and 35%, respectively) versus a more-even balance last year (28% and 29% respectively).

Our checks with sales engagement teams in China indicate a pickup in component sales for November and December OEM builds. The past few months have been hampered by slow sell-through and some inventory digestion as early movers launched more expensive, less competitive products. However, OEMs do not wait for full digestion of stale inventory, but continue to launch better products to help drive subscriber growth at China Mobile ( CHL). At the moment, suppliers are expecting fewer than 250 million 4G units at China Mobile in 2015 (up from a 70 million-80 million unit target this year). With China Unicom ( CHU) and China telecom slower to adopt 4G, this appears more cautious than more aggressive expectations for total China 4G sales of 300 million.

Improving China should not be viewed as a positive derivative for Marvell Technology Group's ( MRVL) (rated at Buy, $17 price target) China 4G exposure. Not only is it facing intense competition in quad-core and octa-core long-term evolution (LTE) solutions from Qualcomm ( QCOM) and MediaTek [of Taiwan], but its OEM exposure has turned less favorable as early-to-market LTE suppliers (Lenovo, Coolpad [both of China]) face share loss as competition improves feature sets and average sales prices (ASPs).

-- Ian Ing

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