is the world's leading vendor of semiconductor chips aimed at the
smartphone market. In addition, it owns a war chest of wireless
patents that allow it to collect royalty checks from the sale of
just about every smartphone sold. Though the stock sold off
following its most recent earnings report, here are three reasons
Qualcomm's shares could be poised to rise over the long run.
Continued mobile chip dominance
While some investors believe that mobile chips are a brutal,
razor-thin profit margin business, Qualcomm would likely beg to
differ. In its most recent quarter, Qualcomm's chip division
(referred to as QCT) did $4.96 billion in sales and generated
$1.12 billion in operating income.That's a 23% operating
More interestingly, though, is that there appears to be a long
runway ahead of the company in the mobile chip business. Not only
does Qualcomm command over 50% of smartphone applications
processor revenue share according to
, but it is making a very concentrated push into grabbing
additional smartphone chip content.
To illustrate, management indicated on its most recent
earnings call that unit shipments of its Wi-Fi connectivity chips
-- typically the stronghold of competitor
-- are on track to grow 40% for the current fiscal year.
CEO Steve Mollenkopf also remarked, "we now have over 100 devices
launched or in design incorporating RF360 [Qualcomm's RF front
Finally, with the mobile chip market showing continued signs
of consolidation, the remaining suppliers are poised to capture
more revenue share, perhaps even at improved margins as
competitive pressures ease.
Qualcomm's licensing business could get a lot
Qualcomm's technology licensing business -- known as QTL -- is
by far the most profitable business that the company runs today.
The bull case seems to be that
, as 2G feature-phones are replaced by 3G/4G smartphones,
Qualcomm sees incremental royalty-bearing units (since Qualcomm
is entitled to collect royalty checks from the sale of 3G and 4G
Qualcomm indicated that a problem it has seen recently with
its technology licensing business, however, is that a number of
local Chinese smartphone vendors have been under-reporting their
3G/4G device shipments. Worse yet, Qualcomm claims that some
vendors are outright selling devices without a license.
This dynamic, according to Qualcomm, affected its QTL business
in its most recent quarter, and the weakness is expected to
continue into the current quarter.
It's not all doom and gloom, though. According to RBC Capital
Markets' Mark Sue, Qualcomm has dealt with these kinds of
situations before with Korean, Japanese, and European vendors.
Qualcomm, too, seems confident that these issues will eventually
Once they do, the company could see QTL revenues and profits
begin to reaccelerate.
Supplier diversification could help chip
While Qualcomm does enjoy reasonably good operating margins in
its chip business, there is likely to be a further opportunity to
increase margins over the long run. In particular, it looks as
though Qualcomm continues to diversify its chip manufacturing
partners both at the low end by adding on
Semiconductor Manufacturing International
, and at the high end -- according to
-- partnering with both Samsung and Taiwan Semiconductor for
future 14-nanometer/16-nanometer nodes.
Since Qualcomm, according to
, commands over 50% of the mobile applications processor industry
revenue, the company is likely to be able to drive down chip
wafer prices from its suppliers as they compete for Qualcomm's
With potentially lower wafer prices, coupled with continued
mobile chip design superiority, the operating margin of
Qualcomm's chip division may be set to rise from current low-20%
levels in the long run.
Foolish bottom line
Qualcomm is a company that is well exposed to the continued
growth in mobile devices from both a patent perpspective as well
as a chip perspective. Though the most recent quarter proved a
bump in the road for Qualcomm's business and share price, and
though these concerns are legitimate, the company is still well
positioned to grow both its business and its stock price over
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3 Reasons Qualcomm, Inc.'s Stock Could Rise
originally appeared on Fool.com.
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