Atheros Acquisition Provides Immediate Upside for Qualcomm Stock
Qualcomm (NASDAQ:QCOM) recently announced its acquisition of Atheros (NASDAQ:ATHR) for $3.2 billion to diversify its product portfolio beyond mobile phones and expand its addressable market into game consoles, media players, tablets and TVs. This acquisition will give Qualcomm a tremendous opportunity to leverage Atheros’ Wi-Fi technology capability in non-handset devices and become more competitive with players like Broadcom (NASDAQ:BRCM), Marvell (NASDAQ:MRVL), Infineon (now acquired by Intel (NASDAQ:INTC)) and Texas Instruments (NYSE:TXN).
Atheros is best known for its Wi-Fi chipsets, but also makes components for Bluetooth, Ethernet and GPS. This acquisition helps Qualcomm supplement its existing product portfolio and establish a position in the chipset market for tablets and other non-handset devices.
Our $51.71 price estimate for Qualcomm stock is in line with the current market price.
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Atheros Provides the Key for Qualcomm to Enter the Tablet Market
Qualcomm has been a dominant player in the mobile phone chipsets market, but until now has lacked the product range (particularly in Wi-Fi chipsets) necessary for non-handset devices like tablets. Wi-Fi is an important component for PCs and tablets as it provides the capability for users to access the internet wherever Wi-fi hotspots are available, typically for free. According to market research firm In-Stat, annual Wi-Fi hotspot sessions are set to increase from 2 billion in 2010 to 11 billion by 2014. [1]
The tablet market, currently dominated by Apple’s (NASDAQ:AAPL) iPad, is also set to see rapid growth in the coming years as new products enter the market. According to market research firm Gartner, the tablet market could see tremendous growth over the next four years, expanding from 20 million units in 2010 to over 200 million by 2014. [2]
Upside Opportunity for Qualcomm Stock
Until now, Qualcomm’s addressable market had been centered around mobile phones, for which it specializes in making cellular baseband chipsets and smartphone application processors (Snapdragon). The mobile phone market has increased at a moderate pace over the past few years, from about 990 million units in 2006 to 1.2 billion in 2009, but the speed has picked up in 2010. [3] We expect the global mobile phones sales to continue its steady climb, breaching 2 billion units by the end of our forecast period.
The Atheros acquisition provides a tremendous opportunity for Qualcomm to move beyond mobile phones. If we make a general assumption that the tablet market could reach 400 million by the end of our forecast period (extrapolating Gartner’s prediction of 208 million tablet market in 2014), the total addressable market for Qualcomm could increase to 2.5 billion, instead of the 2.1 billion that we currently forecast based exclusively on the mobile phone market.
This scenario could provide an estimated upside of 12% to our price estimate for Qualcomm stock, a notable opportunity for investors as our number is currently in line with market price. We note that this 12% upside does not include Qualcomm’s ability to tap into other non-handset device markets, like that of media players and game consoles.
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