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New Mobile Processors Can Reignite Qualcomm's Chipset Business, But Key Threats Cannot Be Ignored


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Qualcomm's ( QCOM ) stock has lost approximately 30% of its value year to date, mainly on account of growing concerns that the company may be loosing some of  its mobile chip dominance. In its Q3 2015 earnings release (fiscal years end with September), Qualcomm announced a detailed restructuring plan to address near-term issues and drive its long-term profitable growth. ( Read Our Earnings Article ) Last week, the company introduced a number of new products and key milestones (mentioned below) that could help revive investor confidence. Can all these efforts help Qualcomm reaffirm its dominance in the mobile market?

We currently forecast Qualcomm's mobile chipset market share to decline from over 85% at present to less than 70% by the end of our review period. While we believe that recent developments can help re-accelerate Qualcomm's mobile chips demand, threats looming over the company's chipset business cannot be overlooked.

Our price estimate of $65 for Qualcomm is approximately 20% above the current market price.

See our complete analysis for Qualcomm stock here

Brief Background

For many years, chipmaker Qualcomm has enjoyed a near monopoly in the mobile chipset market. The mobile business accounts for nearly 90% of the company's revenue, and the smartphone boom has helped the company report strong double digit growth for many years. Qualcomm's top line has grown at a CAGR of over 20% in the last five years.

However, smartphone sales have slowed in the last few quarters as these devices achieve wide penetration. China, the largest smartphone market and a significant source of revenue (approximately 60%) for Qualcomm, saw its smartphone shipments decline for the first time in 6 years in Q1 2015.

A number of factors have slowed Qualcomm's growth momentum in the last few quarters, in addition to the smartphone slowdown.  These include: 1) the rising competition from HiSilicon, Intel, MediaTek, Marvell, Samsung and others; 2) the exclusion of its application processor from Samsung's new Galaxy S6 smartphone; 3) the regulatory investigations in China, the U.S. and Europe;  and, 4) many of its customers choosing to design their own chipsets to lower costs.

Key Developments Announced Last Week Can Help Spur Future Demand

Last week, Qualcomm introduced a number of new processors and technologies.  These include two new Snapdragon processors for mid-range mobile devices (the Snapdragon 430 and Snapdragon 617), and the Snapdragon 820 processor, which has breakthrough connectivity features for the premier tier segment. All processors provide improved connectivity and capabilities over their predecessors. Snapdragon 430 and 617 bring some premium-tier features to the mid-value segment, offering advances in both multimedia and LTE connectivity, and also include support for Qualcomm's Quick Charge 3.0 technology, which allows phones to charge from zero to 80% in about 35 minutes. Snapdragon 617 will be available in commercial devices by the end of this year, while the Snapdragon 820 and the Snapdragon 430 will be available in the first half of 2016. (Read the Press Release)

Qualcomm also announced reaching a milestone for its mainstream segment processors - Snapdragon 410 and 210. Within one year of commercial launch the Snapdragon 410 processor, which brought 64-bit computing power and LTE connectivity to emerging regions, is now available in more than 550 mobile device designs, shipping in more than 200 million units globally from more than 60 OEMs. The Snapdragon 210 processor has been included in more than 200 designs either shipped or in the device pipeline. (Read the Press Release)

The company also announced the inclusion of América Móvil, a leading provider of integrated telecommunications services in Latin America, in its Qualcomm Global Pass program, which aims to reduce device manufacturers upfront development costs and accelerates device commercialization while maximizing the global potential of devices. (Read the Press Release)

The above mentioned products and milestones are testimony to Qualcomm's long-standing technology leadership in mobile.

These Factors Caste A Shadow Over Qualcomm's Mobile Chip Business

In Q3 2015 (ended June 2015) Qualcomm's chipset business saw a 22% decline in revenue. Strategy Analytics estimates that Qualcomm's LTE unit share dropped to 68% in Q1 2015 as a result of increased competition and the Samsung Galaxy S6 loss. The company is suffering from the heightened competition in the premium-tier segment in China, its largest market, as well as the continued under-reporting by certain licensees in the region.

Some other factors that pose a threat to Qualcomm's chipset business are -

1. MediaTek gaining share in LTE Baseband

Qualcomm is a leader in LTE baseband no doubt, but the company is losing ground to smaller Asian rivals, such as MediaTek and Rockchip, which sell ARM-based mobile chips at lower prices. ((Will Intel Corporation Buy Qualcomm, Inc.'s Chip Business?, The Motley Fool, August 1, 2015))

According to research firm Strategy Analytics, Mediatek has firmly established itself as the solid number two to Qualcomm. In Q1 2015, while Qualcomm maintained its baseband market leadership with 61% revenue share, MediaTek accounted for 18% and Spreadtrum 7% of the revenue share. According to Strategy Analytics, Spreadtrum will continue to gain share in 3G basebands and is also expected to make good progress in 4G basebands through 2015. ((MediaTek Captures Double-Digit Share In LTE Basebands in Q1 2015 says Strategy Analytics, PR Newswire, July 3, 2015))

2. Qualcomm customers developing their own SoC

Xiaomi, the largest smartphone vendor in China, appears to be in the process of making its own chipsets for its entry and mid-level smartphones, according to unconfirmed reports by Gizmo China. (Read Our Article) Xiaomi using its own chips in the low-tier and mid-tier segment will serve a major blow to Qualcomm's plan of expanding its footprint in the segment, which is expected to be the primary growth driver for smartphone sales. While Xiaomi will continue using Qualcomm processors for its premium devices, it is a possibility that the Chinese smartphone maker might start designing its own chipsets even for the high-end range in the future. Apple and Samsung, two of Qualcomm's key customers, already design their own processors.

3. Over-dependence on Samsung & Apple

Samsung and Apple and key customers for Qualcomm. Qualcomm's chipset and licensing business revenues related to the products of Samsung and Hon Hai Precision Industry/Foxconn, its affiliates and other suppliers to Apple comprised 49%, 43% and 38% of total consolidated revenues in fiscal 2014, 2013 and 2012, respectively. Thus, any fallout with either of these players can have a significant impact on Qualcomm's business.

After Samsung replaced Qualcomm's processors and wireless modems with its own components in the new Galaxy devices, the latter lowered its full-year sales guidance by more than $1 billion. Apparently, a number of sell-side analysts reported that Qualcomm was experiencing challenges in the most recent round of negotiations with Apple, where the latter is pushing Qualcomm to cut its royalties fees.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Symbols: QCOM , INTC , AMD ,



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