Qualcomm (NASDAQ:QCOM) seems to be making good progress on addressing its 28nm supply crunch. Last week, reports from Taiwan suggested that it had signed on UMC as a second source for the manufacturing process. Now it seems the dominant mobile chipset maker has enlisted the services of Samsung as well to further bolster its supply chain.  This is definitely good news for the company which has seen its stock fall by nearly 20% since it announced its supply constraints during the April earnings call and gave a subdued forecast for the next quarter. However, it did say that it plans on meeting demand by the start of next year and the twin deals should help it keep that commitment.
While the details of the Samsung deal are not known, the report suggested that UMC is expected to supply about 20-33% of TSMC’s contract volume and will start production in the fourth quarter this year. TSMC, for its part, expects to completely meet demand for the 28nm chips in Q1 2013. ((TSMC confirms it will fully meet 28nm chip demand in Q1 2013, PhoneArena, June 13th, 2012)) Having multiple vendors will not only help Qualcomm diversify the risk of one vendor missing targets but also prepares its supply chain for the burgeoning future demand for mobile chipsets.
Sustained high demand for mobile devices
Smartphones have shown significant growth in 2011, and we expect this to continue in 2012 as well. Despite economic uncertainties, consumer shift towards smartphones continues to be strong. iPhone and Android based smartphones have incredibly high growth and tablet growth is picking up momentum as well. Gartner estimates that tablets have registered a growth of over 250% in 2011, and will continue to grow rapidly for the next few years to reach about 370 million unit sales by 2016.  The increasing adoption of mobile devices will help Qualcomm see its mobile chipsets, bolstered by its Atheros’ acquisition last year, gain increased traction.
Emerging markets such as China are seeing an explosion in demand for 3G capable smartphones. With a billion strong mobile subscriber base, China is poised to become the world’s largest smartphone market by the end of the year. (see Qualcomm Rides China’s Smartphone Boom As It Reaches One Billion 3G Subscribers)
28nm demand to remain high
As for the 28nm chipsets, we see the demand continue to remain high especially since there is a lack of such designs currently in the market that not only deliver excellent processing speeds but also conserve space and power as well. This is not only because of the 28nm manufacturing process but also the availability of an integrated radio on the chipset. Moreover, the integrated radio supports LTE which carriers in developed markets such as the U.S. are promoting widely. (see Qualcomm Leads the LTE Charge In 2012) Two popular smartphones, HTC One X and Samsung Galaxy S III, which were launched in international markets with processors from rivals used Qualcomm’s Snapdragon S4 for the U.S. launch, primarily for the integrated LTE support.
As Qualcomm adds more suppliers, the 28nm production process matures and the supply issues are overcome, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated.
Qualcomm will also continue to benefit from the diversified set of customers that it has managed to woo banking on its broad portfolio of Snapdragon chips that includes both integrated as well as standalone processors. A significant design win last year was when it added Apple to its broad customer base last year, replacing Infineon (now acquired by Intel) and becoming the exclusive baseband provider for both the iPhone and the iPad. (see Qualcomm Gets Big Win Over Infineon with iPhone 4S) Apple has already launched the new iPad in March and will launch the next-gen iPhone 5 later this year. We expect the iPhone 5 to sport a 28nm Qualcomm chipset that supports both voice and data over LTE..
We maintain our $68.40 price estimate for Qualcomm, which is more than 20% ahead of the current market price.Notes:
- Qualcomm partners with Samsung and UMC to increase Snapdragon S4 supply, report says, theVerge, July 4th, 2012 [↩]
- Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, Gartner Press Release, April 10th, 2012 [↩]