Why MediaTek Will Beat Qualcomm
MediaTek (2454.Taiwan) received a string of analyst downgrades in early May after the Taiwan smartphone chip maker guided weak second-quarter outlook.
But Wall Street analysts are having a 180-degree turnaround lately. Morgan Stanley, for instance, upgraded MediaTek to a Buy today after downgrading the stock just a month ago. Similarly, Bernstein Research has a nice note out on MediaTek despite a downgrade on May 3. Winning both houses is MediaTek's exposure to emerging markets, India in particular.
As the smartphone market saturates in China, India “presents the world's largest smartphone growth potential for the next 5 years,” according to Bernstein analyst Mark Li and team. Global smartphone and component suppliers will have their battlegrounds in India.
But India is very different from China, where Apple (AAPL) is winning the hearts and wallets. In India, it is more a price game. Last year, 42% of the smartphones sold in India were priced below $100 and this ratio is expected to surpass 50% five years later.
Because of India's unique “low-price, high-specs” characteristics, the local smartphone makers, such as Micromax and Karbonn Mobile, as well as Chinese smartphone manufacturers, are steadily gaining market share. Samsung Electronics (SSNLF), currently the number 1 player in the Indian market, is struggling to keep its market share, because its phones are too expensive. Briefly in the December quarter, Samsung lost its number 1 title to Micromax. Meanwhile the Chinese smartphone makers, still relatively new, have doubled their market share to 12% in the last year.
And this is where MediaTek comes in. Most of the Indian local smartphone manufacturers use MediaTek's chipset. In the case of Micromax and Karbonn Mobile, only about 10% of their phones use Qualcomm‘s (QCOM) chips. In addition, MediaTek has a higher market share among Chinese manufacturers, especially in low-end, which means the phones the Chinese sell in India are likely powered by MediaTek.
And here are Morgan Stanley's Bill Lu and team defending their decision to upgrade MediaTek after the downgrade:
The strong USD has been a negative for pricing. The currency stabilized in April vs. RMB, and that led demand to come back a bit for May/June. USD has started to stabilize against the Indian rupee in the last two weeks, and that could mean Indian demand may return.
Changes in tax rates in India and Brazil also affected pricing. Many brands have now established final assembly plants there to avoid the higher tax.
Apple and Samsung have been gaining share but that is now stabilizing. This could be a positive for MediaTek's customers.
Mediatek is gaining share on the strength of its 4G product portfolio. We see the company getting more than 50% market share in 4G going into 2H15.