High Smartphone Prices, 3G Market Growth Yield 14% Upside for Qualcomm
Qualcomm (NASDAQ:QCOM) is a mobile phone chipset manufacturer and a leading developer of Code Division Multiple Access (CDMA), a mobile phone technology that facilitates communication between mobile phones and wireless towers. Qualcomm competes with Texas Instruments (NYSE:TXN), Broadcom (NASDAQ:BRCM), and Marvell (NASDAQ:MRVL) in the mobile chipset market, and earns royalties on all CDMA smartphone sales worldwide.
Qualcomm’s second-quarter earnings report showed that the company is benefiting from higher-than-expected CDMA smartphone prices (which helps its royalty business), and accelerating 3G penetration in China and India (which helps its chipset business).
In response to these emerging trends, we are boosting our price estimate for Qualcomm’s stock by 14%, from $42 to $48. Our detailed analysis follows below.
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Higher CDMA smartphone prices help Qualcomm
Because CDMA smartphones are more expensive than regular CDMA mobile phones, Qualcomm’s royalty business benefits from CDMA smartphone market growth, which yields higher average CDMA phone pricing.
The CDMA smartphone market has grown faster than expected in recent quarters, led by Android smartphones like the HTC Incredible. These phones are sold with contracts from Verizon (NYSE:VZ), whose network is based on CDMA technology. Although we expect mobile phone prices to decline sharply during the Trefis forecast period, we are raising our average CDMA phone price forecast from $176 to $186 for 2010.
You can move the trend-line in the chart below to create your own CDMA phone price forecast and see how it impacts Qualcomm’s share value.
The next chart shows our forecast for CDMA penetration in the global mobile phone market. You can drag the trend-line to create your own forecast and see its effect on Qualcomm’s stock price.
Qualcomm also benefits from 3G adoption in emerging markets
Approximately 85% of the world’s networks now support the 3G standard. Although 3G adoption levels in emerging markets grew quickly during the last quarter, these markets remain small by global standards. Among 800 million Chinese telecom subscribers, only 12% currently have access to 3G wireless networks. In Eastern Europe, 3G penetration is only 10%.
This suggests a major opportunity for Qualcomm’s mobile chipset business. In another article, we argued that faster 3G adoption in China and India could produce a 5% upside for Qualcomm’s stock.
You can see the complete $48 Trefis Price estimate for Qualcomm here.