These 2 Chip Companies Aren't Worried About High-End Smartphone Demand

A lot of talk has surfaced recently about whether or not high-end smartphone growth has stalled, and if it can get back on track. Some of Gartner's latest data shows that the high-end smartphone market won't enjoy the same expansion it has in the past, but ARM Holdings and Taiwan Semiconductor don't see things quite the same way.

The gloomy outlook
Here are a few quotes pulled from Gartner's smartphone report, released in February:

  • "Lack of compelling hardware innovation has further exacerbated replacement cycles for high-end smartphones in 2013 because consumers don't find enough reasons to upgrade." 
     
  • "While Samsung's smartphone share was up in 2013 it slightly fell by 1.6 percentage points in the fourth quarter of 2013. This was mainly due to a saturated high-end smartphone market in developed regions."
     
  • "Sales of high-end smartphones will slow as increasing sales of low- and mid-price smartphones in high-growth emerging markets will shift the product mix to lower-end devices. This will lead to a decline in average selling price and a slowdown in revenue growth." 

    (Emphasis added)

Yikes. While that sounds like some pretty bad news for Apple's iPhone and Samsung's line of Galaxy devices, it doesn't necessarily mean chipmakers and chip designers feel the same way.


Looking on the brighter side
ARM's Chief Financial Officer, Tim Score, told Reuters earlier this week that demand for smartphones, including high-end devices, will increase in the second half of 2014.

At the end of last year, device makers ordered fewer processors because consumers were buying fewer devices. But Score said that things are changing and that the "inventory correction" late last year is winding down .

And chipmaker Taiwan Semiconductor agrees. The company expects higher revenue in the second quarter, as high-end smartphones need more processors to carry the load of increased features.

In an earnings call last week, Taiwan Semiconductor's president and co-CEO, Mark Liu, said, "The first quarter is typically a slow season for our customers and for TSMC. However, since mid January, we started to see strong orders across all segments." He went on to say that smartphone demand is healthier than they expected last quarter.

What this means for investors
Right now there's a lot of concern that high-end smartphone growth is slowing in markets like the US, and it is a legitimate concern for some device makers. But for Tawain Semiconductors, there's also the upside that high-end devices need more processing power to accommodate new features.

For example, when Apple introduced the iPhone 5s last September, the company added a motion-sensing chip called the M7 processor, in addition to the A7 core processor. So two chips are powering different tasks in Apple's flagship device. As other high-end smartphones adapt this setup, Taiwan Semiconductor could actually see more revenue from chip sales as it supplies device makers with the additional processors.

This is also good news for ARM, because the company licenses out its designs to Taiwan Semiconductor and collects royalty revenue in return. In fact, more than half of ARM's royalty revenue currently comes from Taiwan Semiconductor.

So while high-end smartphone growth may still be something Apple and Samsung have to tackle, ARM's chip designs and Taiwan Semiconductor's processors may not feel the brunt of it for now.

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The article These 2 Chip Companies Aren't Worried About High-End Smartphone Demand originally appeared on Fool.com.

Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and Gartner. The Motley Fool owns shares of Apple. 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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