Qualcomm's got the mobile device market nailed
Qualcomm has scored a number of design wins due to its huge portfolio of Snapdragon chips.
A strong performance throughout the year meant Qualcomm's stock outperformed the overall market, growing by almost 9% over the past year even as U.S. economic recovery came under threat from the European debt crisis.
With a booming smartphone market and growing demand for other mobile devices such as tablets, we expect component suppliers to continue to reap huge benefits. Among these many suppliers, we believe that market leaders such as Qualcomm are especially well placed to capitalize on the coming wave of mobility.
Our price estimate for Qualcomm's stock is $62.25, about 10% ahead of the market. Below we look at some of the most important reasons for our continued faith in Qualcomm's performance.
Trend or no trend, Qualcomm rules
At 60% of total revenues in CY 2011, mobile device chipsets contribute the most to the company's topline, as per our estimates.
Qualcomm has scored a number of design wins due to its huge portfolio of Snapdragon chips that includes both integrated as well as standalone processors. Low-cost and power-efficient integrated processors have long been the darling of the smartphone industry but a recent surge of interest in multi-core processors and LTE capable modems caused standalone processors to see greater demand. This could have concerned a lesser rival but Qualcomm tapped its broad portfolio of products to cater to this short-term shift in demand. (see Qualcomm's Standalone Processors Help Exploit Short-term Shift in Trend)
Significant design wins this year include the iPhone 4S' standalone baseband chip, which replaced Infineon (now acquired by Intel) completely in all of Apple's iDevices. (see Qualcomm Gets Big Win Over Infineon with iPhone 4S)
We believe this design win for Qualcomm will allow it to push its next-generation LTE chipsets for use in Apple's next-generation mobile devices. (see Qualcomm's Next-Gen Chips May Help Apple Launch LTE Devices Next Year) Also, Nokia is using Qualcomm's chips, both standalone and integrated, for the first time in its new Lumia line of smartphones, which shows a growing acceptance of Qualcomm's chipsets in the industry.
Qualcomm has long been an advocate of the integrated approach as it enables optimum performance at low cost while not hogging too much power. In the long-term, we see technology maturing to make multi-core and LTE-capable integrated processors possible and Qualcomm should be happy to see the focus return back to its comfort zone. In any case, Qualcomm has proved that whatever the industry trend, it can adapt quickly enough.
Smartphone demand to continue to rise
Smartphones have shown significant growth in 2011, and we expect this to continue in 2012 as well. Despite economic uncertainties, a consumer shift towards smartphones continues to be strong. iPhone and Android based smartphones have especially incredible high growth and tablet growth is picking up momentum as well. Gartner estimates that tablets have registered a growth of over 250% in 2011, and will continue to grow rapidly for next few years amounting to more than 320 million globally by 2015. The increasing adoption of mobile devices will help Qualcomm see its broad portfolio of mobile chipsets gain increased traction.
The increasingly competitive nature of the mobile device market may however cause a few vendors to fall back, unable to compete. That may have an impact on Qualcomm's chip sales if the lagging handset vendor happens to be a Qualcomm vendor. However, as discussed in HTC's case, we believe this to have little impact on a market leader like Qualcomm which has a hugely diversified customer portfolio that includes smartphones running on all the major operating systems in the world. So barring a slowdown in the overall smartphone market, Qualcomm has little to worry about.
However, increasing competition from the likes of Nvidia, Intel, Texas Instruments and Broadcom could hurt pricing in the overall chips market. Also, as Qualcomm increasingly looks to the emerging markets to increase market share, it will have to lower the prices of its chipsets, further exerting downward pressure on already declining margins. (see Qualcomm Lowers Price on Chips to Penetrate China, Emerging Markets) But the recent Atheros' acquisition could help Qualcomm supplement its existing chipset portfolio by including Atheros' Wi-fi, Bluetooth, Ethernet and GPS capabilities, and sell them at higher prices. (see Atheros Acquisition Provides Immediate Upside for Qualcomm Stock)
Strong intellectual property portfolio
Qualcomm is one of the largest holders of 3G patents. CDMA (Code Division Multiple Access), a wireless 3G technology that has become a world standard for the wireless communications industry was solely developed by Qualcomm. This has allowed the company to charge a royalty from handset vendors for every mobile device sold that incorporates its technology. Further, Qualcomm also licenses out its 3G technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers.
However, developed markets such as the U.S. are slowly transitioning to 4G LTE and LTE will get a major push in 2012, as carriers try to recover the huge costs of the LTE networks they are laying out. Qualcomm licenses OFDMA protocols on which LTE technology is based, however it has lower presence there so the royalty rates from developing markets might see a decrease.
Emerging markets such as China and India where 3G still has very low penetration are seeing increasing 3G adoption and present Qualcomm with the next growth opportunity. For instance, China's 3G subscriber base almost tripled over the past year. Even so, its 3G subscriber base is still only a little more than 12% of the total mobile subscriber base. Growth in cell phones supporting 3G technology will bring in more revenues from license fees.
However, royalty revenue per 3G phone sold in emerging markets will be lower as it is a fixed percentage of the ASP of the phones sold. 3G mobile phones in emerging markets are priced much cheaper than the ones sold in developed markets. Even the company expects ASPs to decline from the range of $203 to $209 in fiscal 2011 to between $197 and $209 in the first quarter FY2012.
Relying on intellectual property to generate revenues will also mean that Qualcomm needs to stay ahead of the competition in setting new technology standards. For example, it will need to come up with innovations in LTE technology as the new 4G standard is set. Its R&D expenses account for more that a quarter of its gross profits and we don't see it declining by a lot any time soon. If Qualcomm fails to maintain the trend of continuous innovation that we have grown accustomed to seeing from the company in the past, it may eventually have to forego its royalty dollars and all the R&D expenditures will have been for nothing.
New market opportunities
Qualcomm has big plans for the PC market in 2012, as it looks to enter this huge market opportunity where its current share is nil. The company announced late-2011 that that it was closely working with Microsoft to bring out a ARM Snapdragon-powered Windows PC in 2012. (see Qualcomm to Enter PC Chipset Market Next Year) We saw CEO Jacobs flaunt a tablet running Windows 8 with full touch sensitivity running ultra swiftly on both the S4 chip and LTE speed at the CES 2012, so we know the company is actually making significant progress.
As users start wanting PCs and other devices to behave more like smartphones, mobile-chipset manufacturers like Qualcomm will have an edge going ahead. Processors based on the ARM architecture such as Snapdragon are expected to make up more than 13% of the PC chip market by 2015, according to a report by IDC. Also, we know how deeply Windows is entrenched in the average PC user's psychology with a dominant 76.5% of PC market share, as per our estimates. Therefore, we expect this association with Microsoft to significantly help Qualcomm gain traction in the PC market.
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