Qualcomm fell almost 5% in trading last Friday as concerns with Apple’s supply chain saw most of its suppliers, including the semiconductor giant, take a hit. The concerns were raised by a Jefferies analyst, who said that some of Apple’s component suppliers had received large order cuts due to “assembly bottlenecks”.  While Apple is indeed a major customer for Qualcomm considering that Qualcomm’s baseband modems power the iPhone and some of the iPads as well, we believe that the market sell-off was irrational for the following reasons.
Not only does Qualcomm currently have the biggest market share in both the app processor and baseband markets, it is also very well-diversified with enough number of hardware partners for Apple alone to have a large impact. With the smartphone market growing at impressive rates, Apple’s market share loss could very well be Android’s or Windows Phone’s gain – both of which have a big Qualcomm presence. Moreover, with most rival smartphone makers going with third-party app processors such as Qualcomm’s instead of building their own (unlike Apple which uses only its baseband), it might even work to Qualcomm’s advantage.
Additionally, Qualcomm announced recently that the 28nm supply overhang, which had lasted for a major part of the year, is easing and will mostly be resolved as we enter into 2013. As the supply pressures ease and mobile demand continues to remain strong, Qualcomm actually looks very well-positioned with its broad portfolio of chipsets and diversified customer base to make the most of its leading position in the mobile chipset market going forward. We have a $69 price estimate for Qualcomm, about 15% 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. 
A foot in every door
With the demand for mobile devices booming, Qualcomm is very 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)
This dominance is even more clear when we look at Qualcomm’s market share in both the app processor and the baseband market. The semiconductor giant has close to 50% market share in both markets, with MediaTek, Intel and Nvidia sharing much smaller proportions of the rest of the pie. Qualcomm’s market share may fall in the coming years but the growing smartphone market should more than make up for the losses. At the same time, Qualcomm will continue to benefit from the rising use of its 3G/4G technology in mobile phones as it brings in a steady stream of high-margin licensing revenues. According to our estimates, patent royalties account for about 35% of Qualcomm’s value.Notes:
- Apple Suppliers Hit By Order Cuts, Analyst Says, WSJ, December 14th, 2012 [↩]
- Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, Gartner Press Release, April 10th, 2012 [↩]