Will This Tech Stock Outperform in 2014?

Neither Apple (NASDAQ: AAPL  ) nor Samsung (NASDAQOTH: SSNLF  ) have helped chipmaker Fairchild Semiconductor (NASDAQ: FCS  ) achieve the growth that analysts were expecting this year. The company's performance has been patchy at best, and the tailwinds that it could have enjoyed as a result of Apple's new iPads haven't materialized.

Lower demand from its "other" mobile customer -- probably Samsung -- and weakness in the Asian budget smartphone market have handicapped Fairchild. As such, the company saw a 1.6% year-over-year decline in revenue in its third quarter and a 51% drop in net income. In addition, gross margin also contracted 200 basis points from the year-ago period.  

The outlook was also quite woeful. Fairchild guided for revenue in the range of $335 million to $350 million for the fourth quarter, significantly behind the $368 million consensus estimate. So, it is clear that Fairchild's business didn't grow as much as expected even during the usually lucrative fourth-quarter when orders from mobile customers should be flowing.

Not the best of scenarios
Fairchild had supplied a total of five chips for the iPads in 2012, and it landed the spots yet again in the latest lineup. The iPad Mini Retina has a couple of Fairchild chips inside it, while the iPad Air has at least one of its chips.Sales of the retina iPad Mini are expected to boom in the first quarter of 2014 as well, after a potentially strong December quarter. Digitimes expects shipments of the iPad Mini with retina to rise to 5 million to 6 million units in the first quarter of 2014, after selling 4 million units in the holiday quarter. 

In addition, the older iPad Mini is also expected to see good demand, with shipment projections from Barclays putting the figure at 6 million to 7 million in the first quarter. But for Fairchild, these positives are cancelled out by lower orders elsewhere.

Fairchild saw "incrementally weaker demand" from its Asian mobile customers as they are reducing inventories. Management said that "demand stabilized at a slightly lower level" at one of its other major mobile customers, indicating Samsung. Samsung was Fairchild's largest customer in fiscal 2012, accounting for more than 10% of revenue. Hence, as Samsung started cutting orders for its latest flagship, Fairchild was in for tough times. 

Potential catalysts
It looks like Samsung had manufactured a bit too many Galaxy S4 devices at launch, and when demand didn't pick up as expected, it started slashing orders. But Fairchild believes that its other mobile customers will drain their inventories in the December quarter, which indicates that order patterns should improve in the first quarter of 2014. 

Now, Samsung is also expected to launch its next smartphone flagship early next year. According to TechRadar, Samsung's upcoming flagship might be released in February or March, which means that the company will start ramping up production pretty soon. So, Fairchild might see order inflows from Samsung in the first quarter.  

The demand environment is not completely favorable, and as such, Fairchild is focusing on improving operational efficiencies to reduce costs. Fairchild's new 8-inch fab facility in Korea began commercial production in the previous quarter, and management is optimistic that this will lead to lower costs going forward. In fact, management believes that this fab could help Fairchild save "tens of millions of dollars" annually from the next fiscal year onward as utilization improves.  

Also, Fairchild is seeing steady improvements in its other businesses -- industrial and automotive. The industrial market performed better than expectations, despite seasonality, and the automotive end-market also performed similarly. The automotive market is expected to grow further going forward, driven by strong demand for Fairchild's drivetrain solutions.  

The bottom line
In fiscal 2014, Fairchild expects modest but steady sales growth in its mobile, industrial, appliance, and automotive businesses on the back of design wins and better demand. Even though the stock has performed woefully in 2013, declining almost 10%, it could turn out to be a dark horse in 2014 if its end-markets recover. Investors might think of picking up some shares, as there are signs that Fairchild could improve going forward.

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