After spending a major part of the year playing catch-up with the burgeoning demand for mobile chipsets, Qualcomm (NASDAQ:QCOM) seems to have finally resolved its supply chain issues. The company said last week that its initiatives to bring additional suppliers on board is paying off as Samsung and Globalfoundries ramp up production to complement TSMC’s 28nm output. With the additional capacity, Qualcomm expects to start meeting 28nm demand by the end of this year – an affirmation of the guidance it had given during last quarter’s earnings call. The ramping up of 28nm supply, together with the holiday demand for new device launches such as the iPhone 5, the iPad mini, the Lumia and many others, should help Qualcomm end the year strongly and position itself for the burgeoning demand for mobile chipsets in the future.
Our $69 price estimate for Qualcomm is about 8% ahead of the current market price.
Sustained high demand for mobile devices
The mobile device market is seeing strong demand growth as mobile data usage continues to witness explosive growth. The fact that Qualcomm registered a 28% uptick in sales for the full FY 2012 despite not meeting demand underscores the fundamentals of the market in which it operates.
Smartphone sales showed significant growth in 2011, and given the >42% year-over-year growth rates seen so far, 2012 is also likely to be a strong year. Despite macroeconomic uncertainty, the consumer shift towards smartphones continues to be strong. iPhone and Android-based smartphones have registered incredibly high growth, and the launch of Windows Phone 8 smartphones should help push the market forward with more ecosystem choices. At the same time, tablet growth is picking up serious momentum. Gartner estimates that tablets grew by over 250% in 2011, and will continue to grow rapidly for the next few years to reach about 370 million unit sales by 2016. 
With the demand for mobile devices booming, Qualcomm seems well-placed with its chipsets finding a place in two of the dominant mobile ecosystems worldwide, Android and iOS. While Apple uses Qualcomm’s baseband chipsets in both the iPhone and the iPad, many Android smartphones use Qualcomm’s stand-alone as well as baseband-integrated chipsets. Android and iOS account for a combined 85% of the market but the near-duopoly could break in the coming years, with Microsoft making a reinvigorated assault on the mobile space with its WP8 OS. But with Microsoft going with Qualcomm as the sole supplier of chipsets for WP8 handsets, Qualcomm has that base covered as well. (see Qualcomm Readies Itself For Microsoft’s Mobile Foray)
28nm demand to remain high
Also, with most of the high-end flagship smartphones supporting LTE, Qualcomm remains the LTE leader by quite a margin. Not only are its LTE baseband chipsets mature – being three generations old already and built with the new 28nm technique that conserves space and power – they also come integrated with its dual-core Snapdragon app processors. This LTE leadership has served Qualcomm well and has thus far kept competitors from stealing market share. For example, Samsung’s Galaxy S III and HTC’s One X series had to be launched in the U.S. with a Snapdragon core, since rival chipsets did not play well with Qualcomm’s LTE basebands.
As for the 28nm chipsets, we expect demand 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 Qualcomm’s suppliers ramp up output, the 28nm production process matures and the supply chain issues are overcome, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated. Since 28nm chipsets are costlier as compared to the other chipsets built on different manufacturing processes, it will also help chipset ASPs rise in the coming quarters.
At the same time, emerging markets such as China are seeing an explosion in demand for 3G capable low-end smartphones. IDC expects China to increase its share of the global smartphone market by over 800 basis points to 26.5% by the end of 2012, leaving the U.S. behind at less than 18%. With a billion strong mobile subscriber base and carriers increasingly trying to transition their huge 2G base to 3G, China presents a huge opportunity for Qualcomm to not only gain from its chipset sales but also a steady stream of licensing revenues. (see Qualcomm Introduces Three New Entry-Level Chipsets To Target Emerging Markets)Notes:
- Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, Gartner Press Release, April 10th, 2012 [↩]