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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: The entry of higher priced standalone smartphone chipsets as well as LTE-compatible ones have caused average chipset prices to rise sharply in the last two years. We currently forecast that Qualcomm's chipset pricing will decline from about $23 in 2013 to $20 by the end of Trefis forecast period, due to increasing competition and exposure to emerging markets. However, there could be a marginal upside to the Trefis price estimate if higher priced chipsets help Qualcomm maintain the average pricing at $22 till the end of the forecast period. On the other hand, if Qualcomm's chipset pricing declines at a faster rate and reach $18 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 about 69% in 2013 to around 63% by the end of the Trefis forecast period. The wireless chipset giant has aggressive plans to tap emerging markets like China and India for 3G rollout. Also, it is the first player to come out with a multimode chipset for LTE technology. However, Qualcomm is also seeing higher competition from Texas Instruments, Nvidia and Broadcom in recent times. There could therefore be a downside of 4% to the Trefis price estimate if its market share falls to less than 55% by the end of the Trefis forecast period.
Mobile Device Royalties
- Royalty Rate: We currently forecast that Qualcomm's royalty rates for mobile devices will decline from 3.2% in 2013 to 2.6% 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 a downside of more than 5% to the Trefis price estimate if Qualcomm's royalty rate declines at a faster rate to reach 2% by the end of Trefis forecast period. On the other hand, there could be an upside of more than 5% to Trefis price estimate if it 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 has more recently, forayed into the nascent femtocell market. 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.
We believe Qualcomm's Mobile Device Chipsets segment is more valuable than its Mobile Device Royalties segment for three primary reasons:
Large Share in a Large Market
Qualcomm accounted for 60% of the CDMA chipsets market in 2013. Mobile devices based on Qualcomm's technology accounted for more than 50% of the 2 billion mobile devices shipped in 2013.
High Chipset Margins and Prices
Although the gross margins on royalty charges are the highest margins within Qualcomm (85-90%), the mobile device chipsets gross margins are expected to remain high as well (~50%). Additionally, we expect Qualcomm to sell chipsets at an average price of ~$20. On the other hand, based on a royalty rate of 3% and an average device price of $224, the average royalty charge per device comes to around $6.80.
Declining Royalty Rates and Mobile Device Prices
We believe Qualcomm's royalty rates will decline over the forecast period. Similarly, we believe average mobile device prices will continue to decline. Since the royalty charge is typically determined as a percentage of the average sale price of a mobile device, the effective decline in royalty per mobile device sold is higher than what is suggested by declines in royalty rates alone. However, the overall negative impact is mitigated to a large extent by the rise in the underlying market of CDMA mobile devices sold.
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 has become the first player to successfully integrate a LTE chipset on its app 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 and BlackBerry smartphones use TI processors. Qualcomm’s Snapdragon also competes with Nvidia’s Tegra processor, Samsung's Exynos and Texas Instrument’s OMAP 4 chipset in the smartphone application processor market.
Tablet's chipset market heating up
The tablet market is expected to grow tremendously over the next few years and hence the tablet chipsets market is also heating up. Qualcomm acquired Atheros to diversify its product portfolio beyond mobile phones and include non-handset devices such as tablets and netbooks, where Wi-Fi is a very important component. Qualcomm recently came out with a quad-core Snapdragon S4 Pro chipset that would help it target the tablet as well as the Ultrabook market, in direct competition with Intel.
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.
Increasing Capital expenditures
Qualcomm's capex has increased tremendously in recent years. Its capital expenditures in 2011 were almost double the previous year and the spending continued unabated in 2012 as well. The rising expenses were primarily related to its investment in a new manufacturing facility being constructed in Taiwan for making Mirasol displays. Mirasol is a display technology used in e-Readers, tablets and smartphones.
However, despite its many advantages, manufacturing Mirasol displays in a cost-effective manner proved too daunting a task, and Qualcomm decided to shut down the manufacturing completely in 2012. The company has now bought a stake in Sharp, with whom it plans to co-develop a similar screen using the latter's IGZO technology. Qualcomm is betting millions here but if the new technology fails to gain much traction again, all of Qualcomm's investment may have been for nothing.
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 famous lawsuit filed by Nokia against Qualcomm is one such example.
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 has also developed Firethorn, which is a banking application that can be used on mobile phones for secure banking transactions.
New opportunity emerging in the Femtocell market
The femtocell 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 recent announcement of Femtocell Station Modem™ (FSM™) FSM9216, FSM9816 and FSM9832 enterprise chipsets, that extend user capacity of a femtocell up to 32 active users.
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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