Spreadtrum Communications, Inc (ADR) (SPRD): Is This China-Focused Smartphone Chip Maker Still a Bargain?

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Heated competition

As the market grows, competition for dominance in emerging markets is intensifying as Qualcomm is now also fiercely targeting the region. Qualcomm will introduce six new Snapdragon 200s that support TD-SCDMA. The chips will also offer multiple-sim support – a feature which is popular in nearly all Asian countries, particularly in India and China. The new chips will be available as early as by the end of the current year.

However, I believe that China will be extremely challenging for QUALCOMM, Inc. (NASDAQ:QCOM) due to fierce price competition from Spreadtrum and MediaTek. It would be difficult for the San Diego-based firm to even maintain its market share as it has to compete solely on price. The China-focused Spreadtrum and Taiwan-based MediaTek have considerable operations in emerging markets and therefore have a cost advantage over Qualcomm.

In fact, some research reports have pointed out that QUALCOMM, Inc. (NASDAQ:QCOM)’s chip usage in China is under serious threat from Spreadtrum and MediaTek.

Meanwhile, Spreadtrum plans to release W-CDMA chips later this year. This will be Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD)’s first foray into this growing market. By 2014, nearly 800 million devices will be using W-CDMA while this number will climb to 1 billion in 2015. Most of this growth will come from emerging markets.

As identified earlier, Spreadtrum’s competitive advantage lies at the low-end of the emerging markets and therefore, in the coming years, with the growth in W-CDMA, I am sure that Spreadtrum will be able to increase its revenue, even if it gets a very small share of the W-CDMA market. Add TD-SCDMA to the equation and we’ll witness a considerable increase in sales in the coming years, even if its market share in TD-SCDMA drops.

Therefore, despite the rise in competition, these factors alone make Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) an attractive long-term investment. However, the recent buyout proposal from China’s state-owned enterprise Tsinghua for $1.4 billion, or $28.50 per share,  caused Spreadtrum’s stock to soar by 16.2% on June 21. The company’s American depositary shares are currently trading at $26.42.

Conclusion

Despite its two recent rallies, the first coming from the positive guidance and the second from the buyout, Spreadtrum is still cheaper than Qualcomm as its stock is trading at relatively lower multiples to its trailing revenue and full-year profit estimates. Spreadtrum’s ADR is currently priced 1.7 times its sales while Qualcomm’s shares are trading at 4.8 times its sales. Therefore, I believe that there is significant room for Spreadtrum’s stock to grow.

Moreover, Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) generates a return of equity of 25% while QUALCOMM, Inc. (NASDAQ:QCOM) gives 18%. Therefore, I believe that Spreadtrum is still looking good and a potential acquisition by a Chinese government-backed organization could strengthen its position in its key market, particularly related to its ability to secure benefits and subsidies in China.

Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool owns shares of QUALCOMM, Inc. (NASDAQ:QCOM).

The article Is This China-Focused Smartphone Chip Maker Still a Bargain? originally appeared on Fool.com.

Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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