Qualcomm Declines to Continue
Qualcomm (NASDAQ:QCOM) recently reported earnings in which it indicated that its royalty rates and chipset prices declined faster than we had expected. We’ve updated the Trefis price estimate for Qualcomm’s stock from $43.53 to $41.64 (vs. market of $39.39) to reflect faster future declines in both royalty rates and chipset prices.
We discuss below why royalty rates and chipset prices are significant for Qualcomm, the reasons behind the faster than expected declines as well as the negative impact these declines have on Qualcomm’s stock.
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Qualcomm Earns Royalties on CDMA Phones; Sells CDMA Chipsets
Qualcomm is a developer of CDMA mobile phone technology used in about 40% of the 1.2 billion mobile phones sold worldwide. The company makes money from every new CDMA-based mobile phone sold.
It does this by selling CDMA chipsets to mobile phone manufacturers such as Apple (NASDAQ:AAPL), Nokia (NYSE:NOK), Samsung, and Motorola (NYSE:MOT); and by charging a royalty to mobile manufacturers on every phone sold that incorporates its CDMA technology. The royalty charge is typically determined as a percentage of the average sale price of a mobile phone. The costs for mobile phone manufacturers like Motorola would increase if chipset prices or royalty rates were to increase, which would have a negative impact on Motorola’s margins.
Royalty Rates will Decline by 15%
Qualcomm’s royalty rates on CDMA technology declined more than expected to 3.6% for 2009, down from 4.0% in 2008. Increases in the number of low end (low price) phones and the lower royalty rates associated with them compared to higher priced smartphones contributed to the decline.
Mobile phone companies like Samsung, LG and HTC that pay royalties to Qualcomm and sell large volumes of low end phones bargain for lower royalty rates due to pressure on their margins from falling mobile phone prices. For example, we believe that the recently completed $1.3 billion license agreement between Qualcomm and Samsung in November 2009 involves lower royalty rates being paid by Samsung.
We expect that Qualcomm royalty rates will continue to decline and reach as low as 2.9% by the end of the Trefis forecast period. You can modify our forecast for Qualcomm royalty rates above to see how much the company’s stock is impacted by changes in royalty rates.
Chipset Pricing will Decline by 10%
Qualcomm’s CDMA chipset prices declined more than expected to $18.5 per chip in 2009, down from about $20 in 2008. We believe the declines are attributable to increased competition from chip makers ST-Ericsson, IFX, and Broadcom in the 3G chipset market.
We expect that chipset prices will continue to decline and reach as low as $17 by the end of the Trefis forecast period. You can modify our forecast for Qualcomm chipset pricing above to see how much the company’s stock is impacted by changes in chipset pricing.
Impact of Further Declines on Qualcomm’s Stock
About 43% of Qualcomm’s stock is attributable to its chipset business while royalty rates constitute another 29% of the value. If chipset prices are $1 lower than we forecast, it will have a $1 negative impact on the stock (2% downside). Similarly, if royalty rates are 0.25% lower than we forecast, it will translate to a $1 negative impact on Qualcomm’s stock.