March 5, 2010 (Chinavestor) I was talking to a dear client of mine who wanted to understand the latest developments of Spreadtrum Communications (NASDAQ:SPRD). He was puzzled by the fact that while the company reported 10.1% revenue growth from previous quarter and earnings tripled on improved margins, the stock fell -9.63% yesterday.Based on what I see at this point, SPRD deserves better.The following chart tracks revenue and gross margin development of Spreadtrum Comm (NASDAQ:SPRD) for the last eight quarters. Revenue and margins bottomed out at the end of 2008 - first months of 2009 and have recovered since. So the close to -10% drop on Thursday came as a surprise.
There are two things I can think of, and I may be wrong here, that might be behind such weakness.
- For one, investors don't buy the successful large scale implementation of TD-SCDMA protocol at all. Deutsche Bank upgraded China Telecom (NYSE:CHA) to Buy from hold and China Unicom (NYSE:CHU) from Sell to Buy last Friday. While the markets took that upgrade very seriously and sent shares of those telcos 4% higher at one point for the week - though both gave back most of the gains by Thursday.
- Telecoms and related industries in general fell out of favor. The sector underperformed for 2009 and is still lacking momentum, hurting telecom suppliers like Spreadtrum Communications (NASDAQ:SPRD).
Nevertheless I believe markets are efficient in the long run - and thus shares of SPRD will have to recover. It may take another 3 months and improved earnings for the market to believe in Spreadtrum's recovery. For me, the company has run a full cycle hitting the bottom earlier in 2009.
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