One of the most disruptive consumer technology trends of the last decade was the adoption of smartphones, which resulted in a dramatic shift in the market share of cellular phone vendors. The adoption of smartphones followed a typical S-curve, with cutting edge innovation and falling prices stimulating demand. Mass adoption of smartphones started in North America, followed by Western Europe, and finally, as prices became affordable, in developing countries within Asia and Africa. However, as with every technology product that follows the S-curve adoption, smartphones have hit a saturation point, globally. As a result, smartphone unit growth rate has steadily decelerated with expected year-over-year growth in 2016 estimated at less than 10% (Exhibit 1).

Exhibit 1: Global smartphone forecast

Source: Citi Global Smartphone forecast

Though smartphone units have reached the saturation point, wireless carriers around the world are still upgrading their networks to the latest wireless standard, 4G LTE (Long Term Evolution). This wireless standard enhances efficiency, allowing more bandwidth to be transferred within the same spectrum. Wireless carriers will see lower capital expenditure intensity over time, but to deploy 4G LTE networks their subscribers must be using 4G LTE-enabled smartphone devices. Developed markets have been early adopters of 4G LTE smartphones but developing and frontier markets, which constitute the bulk of mobile subscribers, are still in the third or fourth inning of adoption. Exhibit 2 shows the changing global mix of subscribers, wherein the number of 4G LTE smartphones is expected to more than double over the next two years.

Exhibit 2: Global subscribers by technology

Source: Citi Research

Within the Driehaus portfolios, we are focused on attractive growth investment opportunities in semiconductor companies that are uniquely positioned to post robust growth as the shift to 4G LTE smartphones continues. At the same time, we are avoiding companies that have seen saturation in market share and are tied to smartphone unit sales or leveraged to older generation 3G networks. Further up the supply chain, we also are interested in companies that supply semiconductor chipsets used in 4G LTE equipment. While the adoption of 4G LTE is well underway in the US, the slower shift globally allows time for select companies within this space to see substantial earnings growth.