Infineon Technologies (IFNNY) shares have been the biggest decliner in Germany after its latest quarterly earnings revealed shaky smartphone revenues. But the chipmaker's expanded focus into electric vehicles could provide hidden value to what has been one of Europe's top-performing stocks.
"We believe the weakness in smartphone revenues may be a blessing in disguise in the longer term," wrote Janardan Menon, an analyst with Liberum Capital. "Over the past 12 months, the volatility in smartphone demand (especially the iPhone 6S) has increased the level of volatility and unpredictability of Infineon's margins."
So far, that's a minority view, given that the chipmaker's stock has fallen about 5% since it published full-year results Wednesday. This made it the worst DAX index performer for two consecutive days. But savvy investors could find hidden value in the dip.
Infineon, which supplies to Action Alerts PLUS portfolio holding Apple (AAPL) and to its rival Samsung Electronics (SSNLF) , admitted it had been "affected" by a shift in smartphone market share to newcomers from the established players. Sales in the power management and multimarket segment, which includes the smartphone chips business, stagnated in the fourth quarter, compared with a 13% year-on-year jump in the automotive segment.
That seemed to mirror research firm Gartner's findings last week that Chinese smartphone makers were the only ones to have enjoyed a sales increase in the most recent quarter, with Huawei, Oppo, and BBK Communication Equipment together accounting for 21% of smartphones sold globally. Apple's market share stood at 11.5% and Samsung's at 19.2%, each down from 13% and 23.6% a year ago, Gartner said.
Infineon management emphasized the chipmaker is making progress in gaining business from the new smartphone players. But should that be the prime area of focus?
It's no secret that the smartphone market is shrinking: Gartner said earlier this year that smartphone sales will no longer grow in double digits and will slow to 7% in 2016 from 14.4% a year earlier. That compares with a 14% compound annual growth rate predicted for the car electronics market between 2016 and 2020 by MarketWatch, and 33.3% for the Internet of Things market between 2016 and 2021 by research group MarketsandMarkets.
And while Chinese makers are gaining presence, it is unclear how long the momentum will last. The Chinese smartphone market, the world's largest, is saturating, and the country's economy is slowing. Moreover, U.S. President-elect Donald Trump has threatened to levy tariffs on Chinese-made goods, which provide 75% of all cell phones and 93% of tablets and laptops, with a promised 45% import tariff that would drive their value up by at least 10%.
Chip designers, and in particular ARM Holdings (ARMH) , whose technology is used in most smartphones, has hinted for some time that while it aims to increase the value of its technology per smartphone, it also has its eyes set on connected devices, or Internet of Things. Softbank's (SFTBY) September purchase of ARM was precisely aimed at that.
ARM believes the total available market for embedded intelligence, or chips used in IOT, will expand by 43% between 2015 and 2020 and peak at $30 billion, outpacing the 39% growth it estimates over that same five-year period for mobile application processors.
Among Infineon's European rivals, NXP Semiconductors (NXPI) is the world's largest automotive semiconductor maker and appears committed to that market. As of October, automotive chips accounted for 41% of its revenue, compared with just 15% for mobile chips and 7% for consumer chips.
While the IOT and automotive are on the rise, one player in the industry stressed the opportunity it still saw in smartphones.
STMicroelectronics (STM) CEO Carlo Bozotti last month said he expects to benefit from the automotive sector for several years, but he also emphasized his desire to be "more present" in flagship smartphones.
Infineon shares have risen 42% in the past 12 months, largely in line with STMicroelectronics, which has advanced 41%. However, for new investors in the shares, valuation is crucial. Infineon's price earnings to growth (PEG) ratio, a measure of the cost of buying into its future earnings growth over the next 12 months, stands at 1.3, compared to a relatively pricey 5.7 for STM.
Given the recent dip in Infineon shares, this could present a rare opportunity to gather slightly cheaper shares before critical holiday sales begin loading into the groups' top line.