Qualcomm (NASDAQ:QCOM) recently broadened its portfolio of Snapdragons to include two new entry-level chipsets that will help it target the demand for smartphones in emerging markets. The chipsets, MSM8226 and MSM8626, not only offer quad-core processing and better graphics abilities but are also built on a 28nm manufacturing process that will help increase battery life. Further, the chipsets will be built with baseband support for all of China’s 3G networks, including China Mobile’s (NYSE:CHL) proprietary TD-SCDMA one, on a single chip. These chipsets are slated to be released for sampling by vendors next year and will nicely complement its growing portfolio of quad-core Snapdragons for the low-end smartphones.
Just a couple of months back, Qualcomm had announced quad-core iterations of existing S4 Play chipsets, MSM8225Q and MSM8625Q, which are expected to make their first appearance in commercial devices in Q1 2013. With emerging markets expected to see the highest growth rates in smartphone adoption in the coming years, Qualcomm is looking to extend its dominance at the high-end to the entry-level smartphone market as well. Our $69 price estimate for Qualcomm stock is about 10% ahead of the market price.
Growing smartphone demand in EMs
The emerging markets demand for smartphones is on the rise. China, for example, is poised to overtake the U.S. as the biggest market for smartphones by the end of 2012. Other emerging markets such as India and Brazil are also seeing strong growth and both are expected to break into the top five markets by 2016, according to the IDC’s latest report. As a result, the mobile app processor market is also seeing high growth rates. A recent report by Strategy Analytics found that the global market for smartphone application processors grew by a strong 55% in Q1 2012 over the same period last year. 
However, while Qualcomm continues to be the dominant player in the high-growth mobile chipset market, its market share is taking a hit due to growing competition from Broadcom (NASDAQ:BRCM) and MediaTek, both of which have benefited from the popularity of low-end Android handsets in emerging markets. Qualcomm’s revenue share of the global mobile application processor market declined y-o-y from 51% to 44% in Q1 2012. With the introduction of the new chipset trio, Qualcomm will seek to regain some of the lost market share.
The entry-level quad-core chipsets will help Qualcomm address the growing demand for low-end phones that can offer higher levels of performance. However, with MediaTek planning on launching quad-core chipsets of its own for entry-level devices at about the same time as Qualcomm next year, it won’t be getting any easier. Competition in the low-end market is getting fiercer by the day, but having a quad-core solution will help Qualcomm defend its market share better without having to cut prices.
China Mobile’s untapped potential
At the same time, Qualcomm will be looking to take advantage of China Mobile’s huge subscriber base and minuscule 3G penetration. China Mobile has the world’s largest subscriber base of close to 700 million, which is about 65% of the Chinese wireless market. However, its 3G growth has been hampered by a largely incompatible home-grown TD-SCDMA network which requires manufacturers to come up with specially crafted handsets for China Mobile. Qualcomm’s new quad-core chipsets will help eliminate this handicap by helping manufacturers build smartphones that support not only other commonly available 3G technologies but also TD-SCDMA. Further, with China Mobile looking to mitigate its 3G shortcomings with a 4G high-speed TD-LTE network, Qualcomm’s LTE expertise could come in very handy. One of Qualcomm’s recent announcements include a dual-core MSM8930 chipset that has support for both TD-SCDMA and TD-LTE.
Addressing China Mobile’s 3G issues will help Qualcomm tap into a huge untapped market of future smartphone buyers. Due to the 3G incompatibility issues, China Mobile has been able to convert only about 11% of its total base to 3G. This compares poorly to the >30% that competing carriers China Unicom and China Telecom have managed to convert. With a huge market of over 600 million 2G subscribers on China Mobile’s network, Qualcomm’s new quad-core chipsets could help it ride the huge Chinese demand for 3G smartphones in coming years.Notes:
- Strategy Analytics: Smartphone Applications Processor Revenue Soared 55 Percent in Q1 2012, MarketWatch, August 7th, 2012 [↩]