Spreadtrum Communications, Inc (ADR) (SPRD): This Stock will Lead you to the Promised Land of Mobile Growth

Shares of Shanghai-based chipmaker Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) have gained close to 10% since the company reported earnings last week. Even though Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) posted a mixed fourth quarter, beating estimates on revenue but faltering on earnings, the stock has rallied on the back of a strong business outlook.

Solid prospects

The company is witnessing an improvement in sales of smartphone chipsets, driven by a shift in consumer preference from feature phones to smartphones. This helped Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) report record revenue of $203 million in the previous quarter, with more than half coming from smartphones.

The company expects this momentum to continue as evident by its current quarter outlook. Spreadtrum Communications, Inc (ADR) (NASDAQ:SPRD) calls for revenue of $180 million to $186 million, comfortably ahead of the $171.6 million consensus. Its product development moves are taking it in the correct direction. Shipments of smartphone chips grew from just a million units in the second quarter to more than 30 million for the entire year, and are expected to be around 80 million to 100 million this year.

The right partnerships

Spreadtrum’s relationship with key smartphone OEMs in emerging markets, especially China, its presence across different smartphone budgets, and capability of delivering efficient, low cost chips have helped it ramp up its smartphone business quickly. The company enjoys a deep relationship with China Mobile Ltd. (ADR) (NYSE:CHL), the world’s largest telecommunications company with more than 700 million subscribers.

Spreadtrum supplies TD-SCDMA standard chips to China Mobile, which added 7 million 3G customers in January this year. Now, China Mobile expects sales of these budget smartphones, along with other TD-SCDMA handsets, to double from last year and hit the 120 million mark this year. Since Spreadtrum commands more than half of the TD-SCDMA market in China through its relationship with China Mobile, it is well-positioned to ride smartphone growth in the region.

Moreover, higher shipments of smartphone chipsets should result in better margins given their high-yielding nature. Spreadtrum’s gross margin was under pressure last year due to a huge decline in average selling prices of 2.5G components. But since its product mix is shifting to better yielding products, better gross margin can be expected going forward.

Spreadtrum is also making its presence felt at the premium end of the smartphone spectrum. Its TD-SCDMA modems are being used by smartphone giants Samsung and HTC in China for powering high-end devices such as the Note II and the One XT. Spreadtrum’s Samsung account is gradually improving, as the Korean smartphone maker used Spreadtrum’s chipset in a low-cost smartphone and also launched a couple of feature phones globally.