2 Companies Benefitting From the Rise of Xiaomi

Xiaomi is on fire in 2014. The Chinese smartphone maker has gone from 0 to 50 million in four years, and CEO Lei Jun expects to sell 60 million phones in 2014. It's certainly off to a good start. Xiaomi announced that it sold 26.1 million smartphones in the first half of the year. That number represents 271% unit growth.

Unfortunately, retail investors can't invest directly in Xiaomi. But, two public companies benefiting from the rise in MIUI (Xiaomi's mobile OS) users are Atmel (NASDAQ: ATML  ) and InvenSense (NYSE: INVN  ) .

Just a touch
Atmel supplies the touchscreen controller for Xiaomi's Mi 3 flagship smartphone, featuring Atmel's MXT540S, which lets users operate the smartphone with gloved hands or wet fingers.

Atmel has seen a lot of success, winning designs for large touchscreens in both Android and Windows 8 products, but hasn't had nearly as much success in the smartphone market. It also has a presence in the automotive touchscreen market.

In Atmel's first-quarter conference call, CEO Steven Laub commented that he expects the company to increase its share of the smartphone marketplace in 2014. Winning designs at rapidly growing OEMs like Xiaomi will certainly help. Atmel also has several design wins at LG Electronics, another large smartphone maker.

Last quarter, microcontrollers (which includes Atmel's touch business) accounted for 70% of Atmel's revenue. It's also one of its fastest-growing segments, although that's not saying much. Microcontroller revenue increased 3% year over year last quarter, while total revenue improved 2.5%. The business was notably affected by a fire in December that shutdown a semiconductor lab in Colorado.

Indeed, Xiaomi's strong growth is beneficial for Atmel to gain share in the smartphone touchscreen market, but alone it isn't enough to drastically improve the company's microcontroller business.

Sensing faster growth
InvenSense supplies the motion-sensing chips found in the Mi 3. The company's six-axis sensor (combination gyroscope and accelerometer) replaced chips from two separate companies in the Mi 2. The design win has already shown up in InvenSense's quarterly reports, where Xiaomi was noted as a "10% customer" in the company's fiscal third-quarter earnings release.

InvenSense is more of a pure-play than Atmel, which makes Xiaomi's growth much more important. The company has steadily gained design wins across the board at smartphone OEMs, but Samsung has grown to become, by far, its largest customer. Last quarter, the Korean electronics maker accounted for 47% of its sales.

Xiaomi's growth will help restore some balance to InvenSense's customer base, but 60 million smartphones isn't even 20% of the number the largest smartphone manufacturer expects to sell in 2014. Unless Xiaomi can continue this rapid growth rate into next year, InvenSense will need to continue winning new designs at other companies to combat potential weakness at its largest customer.

If Xiaomi continues its rapid growth, InvenSense shouldn't have much trouble keeping up with it. Over the last six months, management has taken steps to build inventory and improve its positioning for new opportunities. Additionally, InvenSense has taken a fabless approach to the semiconductor business, which allows it to adjust more easily to increased demand.

Xiaomi is going international
Xiaomi looks poised to become the No. 3 smartphone OEM in the near future. The company intends to expand into Brazil, Russia, India, Mexico, Turkey, and several Southeast Asian nations over the next few years. If it can replicate its success in those large developing markets, it will rapidly grow to challenge the top two manufacturers. This is great news for suppliers like InvenSense and Atmel.

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