Apple, Samsung smartphone race to benefit radio frequency chip makers

Investors and analysts say they like shares of RF Micro Devices Inc, Skyworks Solutions Inc and Avago Technologies Ltd companies that make the chips that enable gadgets to send and receive data wirelessly.

Samsung unveiled its latest flagship phone, the Galaxy S4, in New York on Thursday. The S4 can stop and start videos when someone looks at the screen, flip between songs at the wave of a hand and record sound to accompany pictures.

As manufacturers improve and add new features to phones, which are increasingly used to stream music, video and games, they are boosting the RF chip technology used in the devices.

"The RF content in handsets continues to go up," said Stewart Stecker, a portfolio manager at AlphaOne Capital. "That's good from an immediate to longer-term perspective for the entire RF supply chain."

The importance of RF chips will increase as network operators deploy high-speed wireless technology known as 4G LTE (long-term evolution), analysts said.

LTE requires a much higher number of frequency bands, which increases the number of RF chips in a phone.

The global LTE market is expected to almost double this year, surpassing the $10 billion mark, according to a March 13 report from telecom market research firm Infonetics Research.

"As you add LTE - that's a whole other frequency - you need more radio, more RF equipment," said Northland Securities analyst Tom Sepenzis.

A Verizon customer, for example, using a Samsung Galaxy S4 while traveling the world, would need to be able to use the LTE network in the United States and other countries, said Sepenzis.

"That requires more complex amplifiers that can handle multiple frequencies, requires better antenna solutions, switching capability to handle all the different frequencies. That obviously favors the RF component manufacturers," he said.

Diversifying orders
Within the RF chip supplier group, analysts said those that have diversified their client base by supplying to Samsung, Apple, and other smartphone vendors such as China's ZTE Corp are best placed to take advantage of demand.

After chipping away for years at Apple's market share, Samsung emerged as the No. 1 seller of smartphones last year, undercutting its main competitor with cheaper handsets and a wide range of products.

Samsung sold 64.5 million smartphones in the fourth quarter of 2012, compared with 43.5 million iPhones sold by Apple, data from market research company Gartner shows.

Greensboro, North Carolina-based RF Micro receives about a quarter of its revenue from Samsung, up from 10 percent a year ago, data compiled by analysts showed. Orders from Apple account for a fifth of sales, they said. RF Micro declined to comment.

Power amplifier maker Skyworks relies on Samsung and Apple for about a quarter each of its revenue, analysts said. Skyworks was not available for comment.

T. Rowe Price Global Technology fund portfolio manager Josh Spencer said he likes Avago Technologies Ltd.

"Avago has some very high-end filtering technology that you have to have in the smartphone antennas," Spencer said, adding that he was also considering buying RF Micro's stock.

Shares of RF Micro and Skyworks gained 15 percent and 21 percent respectively from the beginning of the year until February 21, when the upward trend was interrupted by Qualcomm Inc's unveiling of plans to make its own RF chip.

But both stocks recovered a day later after analysts said it was unlikely that Qualcomm would risk damaging integrated circuit partnerships to seek a profit opportunity of not more than $600 million.

Qualcomm has nearly half of the global market for "baseband" chips, which connect mobile phones to cellular networks, and therefore is also set to benefit from rapid LTE growth.

The S4 will use Samsung's application processor in some regions and Qualcomm's Snapdragon chips, which have LTE features, in others.

"Qualcomm has such dominance in the baseband market that they have pricing leverage even against big customers," Spencer said.

© Thomson Reuters 2013