As it turns out, though, J.P.’s warning about Qualcomm may actually have more significance for other players in the smartphone space. Let’s take a quick look at three of the more popular names in smartphone components: Skyworks Solutions Inc (NASDAQ:SWKS) and TriQuint Semiconductor (NASDAQ:TQNT) , for example, both of which supply power amplifiers and related chips used in smartphones, and OmniVision Technologies, Inc. (NASDAQ:OVTI), which supplies a popular line of image sensors for cameras incorporated into phones.
Of the three, Skyworks looks best-positioned to weather a drop in smartphone ASPs, and resulting pressure on components makers to reduce prices in tandem with falling smartphone price tags. Skyworks is profitable, with a 22 P/E. It generates strong free cash flow — 14% ahead of reported net income in 2012. And it’s sitting on a big pile of cash — $378 million already. All in all, a nice position to be in.
In contrast, TriQuint and OmniVision both have cash in their favor — $139 million for TriQuint (and no debt); $95 million (net of debt) for OmniVision. But both companies are burning cash like mad, and neither boasts a P/E ratio that anyone sane could call attractive. OmniVision shares cost a steep 55 times earnings, while TriQuint has no earnings, and therefore no P/E at all. If J.P.’s right, neither of these stocks looks like a place you want to be when the other shoe drops, and we see predictions of falling ASPs turn into actual reports of falling ASPs — and falling profits for component makers.
Finally, some good news for Nokia Corporation (ADR) (NYSE:NOK)
One final thought: JP’s prediction of a squeeze on average selling prices for smartphones may be bad news for component makers like TriQuint and OmniVision, and even for Qualcomm and Skyworks. It could be good news, however, for Nokia , whose Lumia is starting to grab a toehold in the market, and whose prices are looking very competitive indeed, both here in the U.S. and in Asia as well. Nokia just finished reporting its first quarterly profit since Q1 of 2011, and its best free cash flow quarter since Q4 of that year — $550 million.
If manufacturers’ scramble to bolster sales growth at the cost of profit margins turns the sale of smartphones turns into a race to the bottom on prices, well, Nokia’s already halfway there already. And it’s making a profit regardless.
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The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 352 out of more than 180,000 members. The Motley Fool owns shares of Qualcomm and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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