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Why Spreadtrum Communications Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of fabless semiconductor maker Spreadtrum Communications (Nasdaq: SPRD  ) nosedived as much as 14% after it reported its second-quarter results.

So what: For the quarter, Spreadtrum reported an 8.1% increase in year-over-year revenue to $173.1 million, which was in line with the company's previous forecasts for $170 million-$175 million in revenue. Net income, however, fell to $0.58 versus a profit in the year-ago period of $0.65. The thing that has shares heading sharply lower is Spreadtrum's third-quarter sales forecast. The company is now projecting sales of $178 million-$186 million versus Wall Street's expectation of $188 million, and blaming 2.5G handset component constraints for the slowdown.

Now what: Spreadtrum is really a toss-up at the moment. On paper, it's incredibly cheap, and strength in smartphone sales in China from its largest service provider, China Mobile (NYSE: CHL  ) , should drive Spreadtrum's bottom-line results. On the flip side, Spreadtrum's reliance on older technologies is dragging down margins and supply chain snafus are making it even worse. Spreadtrum is a highly cyclical company, so with China's growth slowing to three-year lows, now may not be the best time to expect the company to rebound. I would, however, recommend adding it to your Watchlist.

Craving more input? Start by adding Spreadtrum Communications to your free and personalized Watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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