Hey Alexa, Which Chipmaker Found Life After Smartphones?
(Bloomberg Gadfly) -- "That would be MediaTek Inc."
You can probably thank (blame) the Taiwanese chip designer for making smartphones cheap and generic. When it took on Qualcomm Inc. in the feature phone market, it earned the moniker 'King of the Bandit Phones' by making it easier for customers to develop handsets quickly.
Once the smartphone era arrived -- heralded not only by Apple Inc.'s iPhone but the launch of Google's Android operating system -- MediaTek also earned higher returns for shareholders.
Then things fell apart. Qualcomm upped its game and the smartphone market slowed. Anemic revenue growth in 2015 led to a plunge in earnings, while a decline in sales last year was offset by one-time gains that propped up the bottom line. MediaTek's stock traced this trend, touching an eight-year low in mid-2016 and moving sideways from there.
A curious thing has happened over the past year, however. Global smartphone demand hasn't turned around, and competition to supply chips for the devices has barely eased. Yet MediaTek's shares are up 65 percent over the past 12 months.
One obvious narrative is that the Taiwanese underdog is benefiting from China's trend away from U.S. companies like Qualcomm. ZTE Corp.'s ban on purchasing American chips fueled a 6.5 percent jump in MediaTek's stock last Wednesday, before the company issued a statement saying it will see little benefit.
In fact, it's hip new devices like Amazon.com Inc.'s Echo voice assistant and smart bikes, made popular by China's rental craze, that have given MediaTek a fresh lease on life.
Sanford C. Bernstein & Co. analyst Mark Li summed it up, noting in a report that MediaTek isn't "simply a smartphone stock anymore." Less than two years ago, mobile -- comprising smartphones and tablets -- accounted for 59 percent of its revenue, according to Li. By the fourth quarter of last year, that ratio had flipped, with non-mobile contributing 59 percent.
This change in product mix has had a limited impact on revenue so far, but the effect on profitability has been clear.
Li estimates that not only does MediaTek command a 70 percent share of the smart speaker market, but the segment attracts higher gross margins than mobile chips, helping to raise the corporate average. In the December quarter, that figure climbed to 37.4 percent, the highest in almost two years.
In January, CFO David Ku told investors that while smart speakers currently do most of their heavy lifting in the cloud, where analysis and processing is completed on central servers, it's likely future devices will have artificial intelligence built in. That's good news for MediaTek because it already makes AI chips and has them in a range of smartphones.
Beyond Amazon's Echo, media have reported that Apple and Alibaba Group Holding Ltd. are both set to use MediaTek in smart speakers and other devices. MediaTek also isn't concerned bike sharing is a passing fad because the cycles serve as a showcase for its technology, which will likely lead to other product categories.
MediaTek isn't giving up on smartphones -- it expects its share of the segment to remain stable or climb this year. But relying on mobile is an echo of times past.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.
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