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Chip Stocks to Profit From Your Hyperconnected Life

As the number of web-connected devices used by consumers and businesses keeps moving higher, chipmakers are benefiting not only from higher device shipments but from the total value of the chips going inside many wide-used devices moving higher. Here are a few of the chip firms that will benefit from the trend.

RF Chipmakers

For the past several years, makers of RF chips such as power amplifiers, filters and antenna switches have seen their mobile phone-related sales outgrow the phone market as each new generation of smartphone models require more, and more advanced, RF circuitry than its predecessor. 4G proliferation, the arrival of 4G standards supporting higher download speeds, the need to support more frequency bands and the spread of more advanced Wi-Fi radios that can send or receive data from several antennas at once have played roles.

But increasingly, a lot of the growth seen by RF firms is coming from markets other than mobile, as the number of Wi-Fi and/or mobile radios being placed inside things like cars, home electronics, industrial equipment and medical devices mushrooms. It also doesn't hurt that new types of web-connected devices -- think drones, home speakers, wearables, etc. -- keep arrive.

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In a couple of years, 5G network rollouts will act as a fresh catalyst for both of these trends. Both because it delivers a fresh dose of RF complexity for phones, and because 5G is being built from the ground up to efficiently support tons of web-connected devices.

Skyworks Solutions Inc. (SWKS - Get Report) and Qorvo Inc. (QRVO - Get Report) are each close to being RF pure-plays. Each still depends heavily on sales to top-tier smartphone OEMs -- relatively speaking, Skyworks depends more on Apple Inc. (AAPL - Get Report) , and Qorvo on Samsung -- but each has also been hungry to diversify. And both firms trade for less than 15 times this fiscal year's expected earnings.

Broadcom Ltd. has a booming RF business, in part due to the company's leading position in the market for FBAR filters, which are now used in large quantities within power amplifier modules going into high-end phones. And it's also a major supplier of Wi-Fi/Bluetooth connectivity chips. But it's far from a mobile and IoT pure-play: The company also depends heavily on sales of chips and components going into servers, storage arrays and networking/telecom equipment.

Qualcomm

Qualcomm Inc. (QCOM - Get Report) comes with a pair of risks attached. The company's very lucrative mobile patent-licensing business is entangled in disputes with Apple, an unnamed major licensee (possibly Samsung) and a slew of regulators that risk dinging its future royalty rates. And to pull off its planned acquisition of NXP Semiconductors NV (NXPI - Get Report) , Qualcomm may ultimately have to add a few billion dollars to the deal's original $47 billion price, in order to satisfy disgruntled NXP shareholders.

Jim Cramer and the AAP team hold positions in Apple, Broadcom and NXP for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, AVGO or NXPI? Learn more now.

But with Qualcomm now trading for just 12 times its fiscal 2016 (ended in Sep. 2016) earnings and due to get a large EPS boost from the NXP deal's closing (even at a slightly higher price), a lot of this has been priced in. What might not be fully appreciated, however, is the extent to which Qualcomm's chip business -- long associated with mobile system-on-chips (SoCs) and modems -- is remaking itself into a top-tier supplier of processors, 4G modems, connectivity chips and RF chips for connected devices in general.

As it is, Qualcomm's chip division revenue from non-phone markets grew 40% in fiscal 2016 to $2.4 billion, or 16% of its total revenue. And with the company saying its chip revenue from "adjacent markets" -- that is, markets outside of mobile SoCs and modems -- was up 30% in the June quarter, those numbers should be higher for fiscal 2017.


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