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Investment Overview for Qualcomm (NASDAQ:QCOM)
Below are key drivers of Qualcomm's value that present opportunities for upside or downside to the current Trefis price estimate for Qualcomm:
Mobile Device Chipsets
- Qualcomm Chipset Pricing: We currently forecast Qualcomm's chipset pricing to decline from $17.7 in 2015 to approximately $15 by the end of Trefis forecast period, due to increasing competition and exposure to emerging markets. There could be a marginal upside to the Trefis price estimate if higher priced chipsets help Qualcomm maintain the average pricing at $18 till the end of the forecast period. On the other hand, if Qualcomm's chipset pricing declines at a faster rate and reaches $12 by the end of our forecast period, there could be a marginal downside to the Trefis price estimate.
- Qualcomm Chipset Market Share: We currently forecast Qualcomm's chipset market share to decline from 39% in 2015 to around 36% by the end of the Trefis forecast period. Qualcomm has aggressive plans to tap emerging markets like China and India for 3G/4G rollout. Also, it was the first player to come out with a multimode chipset for LTE technology. However, Qualcomm is seeing increased competition from other chipset makers like MediaTek and Broadcomm. The company's chipset business is also threatened from its own customers like Samsung, Apple and Xiaomi, as the smartphone makers plan to develop in house chipsets to improve margins. There could be a more than 10% downside to our price estimate if Qualcomm's market share declines to 25% by the end of our review period.
Mobile Device Royalties
- Royalty Rate: We currently forecast that Qualcomm's royalty rates for mobile devices will decline from 3% in 2015 to 1.9% by the end of the Trefis forecast period. Royalty rates have come under pressure as Qualcomm expands its business to emerging markets, which command lower rates. Another reason for the expected decline in royalty rate is Qualcomm's not so strong patent position in 4G technology as compared to 3G. There could be an approximate 10% downside to the Trefis price estimate if Qualcomm's royalty rate declines at a faster rate, reaching 1.2% by the end of Trefis forecast period. On the other hand, there could be a similar upside to our valuation if Qualcomm is able to retain its current royalty rates over the Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Qualcomm at the top of the page.
Qualcomm is a leading developer of Code Division Multiple Access (CDMA) , a mobile device technology that facilitates communication between mobile devices and wireless towers.
Qualcomm makes money by selling chipsets for mobile devices, tablets and femtocells. It sells chipsets to mobile device manufacturers such as Apple, Samsung, Nokia and Motorola Mobility; and charges a royalty to mobile manufacturers on every device sold that incorporates its technology. The royalty charge is typically determined as a percentage of the selling price of the mobile device.
Qualcomm also licenses its CDMA technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers. In addition to licensing fees, the company also collects a royalty on every CDMA handset sold from the handset manufacturers. The company believes that competitive pricing and widespread availability of CDMA chipsets will encourage wider adoption of CDMA within mobile devices and will increase the size of its royalty base.
Qualcomm also licenses OFDMA protocols on which LTE/WiMax technology is based.
Qualcomm derives over 80% of its valuation from its mobile licensing and mobile chipset business.
3G to 4G LTE transition
LTE, which stands for Long Term Evolution, is the 4G technology that will enable faster data transmission speeds to mobile devices. Verizon, which is in the process of upgrading its network to LTE, claims that the technology is capable of peak download speeds of 40 to 50 Mbps and peak upload speeds of 20 to 25 Mbps. This transition is speeding up especially in developed markets such as the U.S., where all the national carriers are laying out LTE networks.
In this regard, Qualcomm is leading the LTE transition, having started the commercial production of multimode chipsets that enable mobile phone users to transition from 3G to LTE technology. Moreover, it was the first player to successfully integrate a LTE chipset on its application processor. This addresses the widespread concerns that LTE handsets are not only bulkier but also hog much more power.
Battle of Smartphone Application Processors
Qualcomm’s Snapdragon is extensively used in Android-based smartphones and Microsoft’s Windows Mobile smartphones, while the latest Apple iPhone uses an A7 processor. Qualcomm’s Snapdragon also competes with Nvidia’s Tegra processor, Samsung's Exynos and Intel's Atom processors in the smartphone application processor market.
3G Adoption in Emerging markets
Growing adoption of 3G mobile phone technology by mobile operators favors Qualcomm, which is the leader in the development of 3G CDMA technologies. The biggest opportunity for 3G adoption is in emerging markets, such as India and China.
A multimode LTE baseband chipset recently developed by Qualcomm also supports the TD-SCDMA technology that China Mobile's network runs on. For years, the iPhone hasn't come to China Mobile due to incompatibility issues. However, now that the iPhone can theoretically support China Mobile's network, it seems likely that Apple will bring the carrier on-board for its China ambitions. Considering that China Mobile is the largest wireless carrier in the world, the upside to Qualcomm from this deal could be immense.
Pressure on Qualcomm Royalty Rates
Qualcomm charges royalties on each mobile device sold based on its technology, and one-time licensing fees from mobile chipset vendors to use its proprietary technology. Royalty rates have always been a debatable issue; and the tussle between mobile device vendors and Qualcomm has escalated, as is evident from an increasing number of lawsuits against Qualcomm. The company is currently facing regulatory investigations in the U.S. and Europe.
After a year long battle, Qualcomm last year agreed to pay China’s National Development and Reforms Commission (NDRC) $975 million in fines for alleged monopolistic practices in the region. China is a major source of growth for Qualcomm’s 3G/4G LTE chipsets.
As part of the settlement with NDRC, Qualcomm has agreed to ease its royalty rate regimen for Chinese vendors. Under the terms of the agreement, Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents, widely used by Chinese device makers, separately from other patents. For companies opting for the new agreement, which applies to phones sold for use in China, Qualcomm will calculate royalties based on 65% of the phone’s selling price, instead of on the whole price. Lowering its royalty rates in China could affect the Qualcomm's licensing deals elsewhere, forcing the company to reduce its royalty rates globally.
Moreover, with LTE catching on in many developed markets, there could be a negative pressure on royalty rates that Qualcomm charges as it doesn't have as strong a presence in OFDMA patents as it does in CDMA.
Increasing Availability of Mobile Broadband and Mobile Applications
The increasing availability of mobile high speed data access creates opportunities for Qualcomm to provide mobile device software applications that utilize its technology.
The company also developed Firethorn, which is a banking application that can be used on mobile phones for secure banking transactions.
New opportunity emerging in the Small Cells market
The small cells market is expected to experience significant growth over the next few years, as more and more users abandon landline connections in favor of mobile phones and demand for better network coverage surges. Competition has been shaping up well with Broadcom entering the fray with its acquisition of Percello, a semi-conductor start-up that specializes in femtocell design. Recognizing the immense potential of this market, Qualcomm has also beefed up its efforts as evidenced by the announcement of its collaboration with Samsung to deliver small cells supporting LTE in unlicensed spectrum.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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