Summary
- Wednesday afternoon, Pixelworks made a major (and mandatory) disclosure to the SEC that Apple represented more than 10% of its revenue.
- The stakes couldn’t be higher for Apple. Any consumer device that can run a smart phone operating system is strategically important. Apple needs to become more competitive.
- Samsung has dominated the television market for years. This is where Samsung holds the most decided advantage over Apple. I believe PXLW represents Apple’s best hope of closing the gap.
Last night, Pixelworks (PXLW) released its 10-K (annual report) to the SEC. In it, the company made a major (and mandatory) disclosure that Apple (AAPL) represented more than 10% of its revenue. This was something I predicted in May of last year. However, prior to this filing, there was no public proof of a relationship between the two companies.
Unsurprisingly, I was accused of "pumping" at the time (as I was when I predicted that HIMX would power Google Glass, on Seeking Alpha in March of last year). Mistrust and disbelief in a new concept is actually a very common human trait, but on Wall Street, research trumps emotions. In this case, hundreds of hours of research told me that Apple and Pixelworks would make very intuitive business partners.
Until now, PXLW had been reticent to comment on anything to do with Apple. This is likely because Apple imposes heavy prejudices against its suppliers who discuss their dealings unless required by law. Fortunately, disclosing major (more than 10% of revenue) customers is required by the SEC.
As a result, the proverbial cat is now out of the bag. It took longer to be vindicated this time (the HIMX vindication took four months), but needless to say, I'm excited to see this news and look forward to seeing where the relationship goes in 2014.
For Apple, the stakes couldn't be higher. After losing tremendous share to Samsung (OTC:SSNLF) in the past year, the Cupertino giant is scrambling to find its footing. Many still doubt the viability of various "smart" products (glasses and watches, among others). However, market research firm IHS iSupply predicts that smart TVs will soon represent the majority of worldwide TV sales, with as many as 100 million expected to ship next year.
For major smart phone vendors like Apple, competing is more than just an attractive option - it's absolutely critical to its future. Any consumer device that can run a smart phone operating system (like Android, iOS, Windows Mobile, BB10, etc) is strategically important. Electronic devices are increasingly linked to the Internet and more importantly, each other. Failing to offer a key device potentially creates a missing link in the chain. This could lead to significant share losses in an environment where momentum defines the difference between leadership and irrelevance.
However, AAPL has virtually no background in television technology. This contrasts greatly against Samsung, which has dominated the TV market for years. Indeed, when comparing the two vendors, this is where Samsung holds the most decided advantage. Thus, I continue to believe that Apple is looking to obtain the necessary expertise to close the gap. In my opinion, PXLW still represents Apple's best hope.
If That Wasn't Enough…
In other Pixelworks-related news this week, Digitimes reported that Ultra HD TV demand is expected to exceed 12 million units this year. With inventory build-ups in the channel, Ultra HD TV shipments are expected to far exceed the demand figure, reaching close to 18 million units. Signs continue to point toward a faster ramp for Ultra HD than I've been expecting, which is an obvious positive for PXLW.
We also note that Google Trends shows that interest in projector TVs is rebounding after many years of decline. We believe that this is being led by demand in Asian countries, but closely followed by the U.S.
In addition to being a leading player for Ultra HD video processing, PXLW is also extraordinarily well-positioned in the projector space (a position that we expect to accelerate as we proceed through 2014). The Digitimes research and the chart below indicate that PXLW is beginning to experience a macro tailwind on both counts.
Worldwide Interest in Projector Televisions
(click to enlarge)
Source: Google Trends
Of course, PXLW remains a constituent of our Poised To Triple Portfolio, in which 70% of my Core/Speculative picks (19 of 27) have doubled, tripled, or been acquired. We're looking forward to celebrating #20. Subscribers to my PTT Newsletter will be exclusive recipients of my next pick to triple on Friday.
Additional disclosure: Mr. Gomes’ investment Methodology is the basis of his selection process, as well as his asset allocation and trading decisions. Investors who seek to act on his research should first read his Methodology at PoisedToTriple.com.
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