Qualcomm (NASDAQ:QCOM) is expected to report its Q1 2013 earnings on April 24. The company has had a record run over the last several quarters, riding the growing demand for mobile devices to grow revenues year-over-year by almost 30% each quarter. However, since the last earnings call, Qualcomm’s stock hasn’t moved much despite the company raising its EPS guidance for FY 2013, as increasing concerns about Apple’s (NASDAQ:AAPL) competitive positioning in the mobile market took a toll on investor sentiment. While Q1 is likely to be seasonally weak coming off a record holiday quarter, we don’t think Qualcomm’s exposure to Apple is a big concern going forward.
Our conviction in Qualcomm is derived not merely from the fact that the company currently has the biggest market share in both the app processor and baseband markets, but also that it has one of the most well-diversified customer base 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. What’s more, even BlackBerry’s newly launched LTE-capable Z10 smartphones run on Qualcomm’s integrated chipsets. Also, with most smartphone makers going with third-party app processors such as Qualcomm’s instead of building their own (unlike Apple which makes its own app processor and only uses Qualcomm’s baseband), such a situation might even work to the chipset maker’s advantage.
Additionally, Qualcomm has managed to overcome supply constraints for the 28nm chipsets, which had been an overhang on sales for the most part of last year. The fact that the company registered a 28% uptick in sales for FY 2012, and followed it with 30% revenue growth next quarter despite not completely meeting demand, underscores the fundamentals of the market it operates in.
With the supply pressures having eased and demand for mobile devices continuing to remain strong, Qualcomm 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 $71 price estimate for Qualcomm, which is about 10% ahead of the current market price.
Sustained High Demand For Mobile Devices
The smartphone market has showed significant growth in recent years. Gartner estimates that almost 675 million smartphones were shipped worldwide last year, a growth rate of more than 43% over 2011. A consumer shift towards smartphones continues to be strong despite some lingering macroeconomic uncertainty, and it is likely that the momentum will push the smartphone market closer to the 1 billion mark by the end of 2013. At the same time, the growth of other mobile devices such as tablets is picking up serious momentum. IDC estimates that tablet sales grew by over 65% in 2012 to 117 million units, and will continue to grow rapidly for the next few years to reach about 260 million unit sales by 2016. 
A big driver of the future mobile growth will be emerging markets such as China that are seeing an explosion in demand for 3G capable smartphones. IDC expects China to have increased its share of the global smartphone market by over 800 basis points to 26.5% in 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 earn a steady stream of licensing revenues. (see Qualcomm Introduces Three New Entry-Level Chipsets To Target Emerging Markets)
We currently estimate that the 2G to 3G/4G transition will see the penetration of 3G/4G mobile devices worldwide grow from about 50% currently, to a little under 70% by the end of the forecast period. However, the growing adoption of smartphones in emerging markets buoyed by the increasing number of low-end affordable smartphone options could see 3G/4G penetration increase to about 80% by the end of our forecast period. Such a scenario would add a further 10% upside to our price estimate.
LTE Supremacy Will Help Ward Off Competition
Strong demand for smartphones is helping the cellular baseband market grow by impressive rates every year. Last year, the baseband market grew by a strong 18% y-o-y, to reach about $18 billion. Qualcomm, which dominates the market with more than 50% market share, has benefited hugely from this trend. But the rapidly growing mobile device market has attracted the attention of a diverse set of semiconductor manufacturers, who are all vying for a greater chunk of the rapidly growing business in the coming years. Recently, both Nvidia and Broadcom achieved significant milestones in their LTE plans. Nvidia announced its first LTE-integrated app processor, the Tegra 4i, and Broadcom introduced its first LTE baseband chip in the market.
However, Qualcomm has already taken an almost monopolistic control over the nascent LTE baseband market. Of the 47 million LTE-capable chipsets that were shipped last year, Qualcomm accounted for nearly 86% of the market. This big lead is a testament to the company’s superiority in 3G/4G connectivity solutions that helped it come to market first with LTE designs. As a result, while competitors are only now bringing their first LTE basebands to market, Qualcomm’s chipsets are in their third-generation already. It is this maturity which the semiconductor giant brings to the table that caused Apple to shift its baseband supplier from Infineon (now acquired by Intel) to Qualcomm, back in 2011, when it launched the iPhone 4S.
So while we believe that the LTE transition gives the new entrants their best chance at competing more effectively with the market leader, Qualcomm’s smart anticipation of the LTE demand and its proactive moves to get its basebands LTE-compatible, as well as integrate them on its Snapdragon app processors much before the rest of the market, have helped it ride the initial demand and should help it hold down the fort in the near term as well. Qualcomm’s recent launch of RF360, which tries to solve the problem of LTE fragmentation by allowing handsets work on most LTE frequencies, further solidifies the company’s stature in the market and its ability to lead with first-to-market innovative solutions. Apart from Qualcomm’s baseband supremacy, we expect its diverse set of customers and strong focus on power conservation to continue to help it ride the mobile revolution, for years to come.Notes:
- IDC Raises Its Worldwide Tablet Forecast on Continued Strong Demand and Forthcoming New Product Launches, IDC Press Release, September 19th, 2012 [↩]