Having ridden the mobile revolution to new highs, Qualcomm (NASDAQ:QCOM) rewarded its shareholders with the announcement of a new $5 billion share buyback program. This replaces an earlier share repurchase program of the same amount announced in March this year, of which $800 million is yet to be exercised. The announcement shows the business’ strong cash flows as well as the management’s willingness to reinvest the cash in its stock which is trading close to its all-time high. The company generated about $6.3 billion in operating cash flows in first nine months of FY 2013, around 37% higher than during the same period last fiscal year.
Being at the forefront of technology innovations happening in the 3G and 4G world, the mobile semiconductor giant has benefited from the burgeoning demand for smartphones and other mobile devices. The company’s unique business model allows it to profit from not only the sale of its own brand Snapdragon chipsets, but also higher margin licensing fees that it derives from the sale of all mobile devices which can connect to 3G/4G networks. While Qualcomm gradually faces increasing competition in the chipset space from rivals such as Nvidia (NASDAQ:NVDA), Broadcom(NASDAQ:BRCM) and MediaTek, we expect the company to continue to leverage its early 4G LTE lead to good effect, going forward. Simultaneously, the rapidly growing mobile market ensures that Qualcomm will continue to rake in a steady stream of high margin royalties well into the future. Our $71 price estimate for Qualcomm is in line with the current market price.
Sustained High Demand For Mobile Devices
The smartphone market has showed significant growth in recent years. Gartner estimates that almost 225 million smartphones were shipped worldwide in Q2 this year, a growth rate of more than 46% over the same period in 2012. The 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, growth of other mobile devices such as tablets is picking up serious momentum. IDC estimates that tablet sales grew by about 65% in 2012 to 117 million units and will continue to grow rapidly for the next few years to reach about 468 million unit sales by 2017. 
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 3G/4G penetration of 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 the 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 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. Earlier this year, 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 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. Q1 2013 saw the share increase to rnearly 97%, according to Strategy Analytics. 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 compatible with LTE, as well as integrate them with 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 letting 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:
- Gartner Says Worldwide PC, Tablet and Mobile Phone Combined Shipments to Reach 2.4 Billion Units in 2013, IDC Press Release, April 4th, 2013 [↩]