Xiaomi’s Independent Chipsets Could Serve A Serious Blow To Qualcomm

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Chinese smartphone maker Xiaomi appears to be in the process of making its own chipsets for its entry and mid-level smartphones, according to unconfirmed reports by Gizmo China.  In fact, reports have accumulated over the summer since Xiaomi first established an alliance with a major fabless Chinese semiconductor company earlier this year.  Most authoritative among them are articles by EE Times’ correspondent Junko Yoshida in May and June quoting insiders to the effect that Xiaomi feels the need to differentiate its offering with its own silicon. New details have emerged that prompt us to share the following.

At present Xiomi uses Qualcomm (NASDAQ:QCOM) and Mediatek chipsets for its smartphones. According to Gizmo China, as noted above, Xiaomi will release two different versions of its independent processor next year. The first one will be a low-end chip which will be used in Xiaomi’s super cheap Redmi series. The second version is said to be a higher-end octa-core chip which will be used for its mid-range devices. Though Xiaomi is expected to continue relying on Qualcomm for its high-end smartphones, the move could put a serious dent in Qualcomm’s smartphone business, which accounts for more than 90% of the company’s total revenue. Apple and Samsung already design their own processors.

Recently, Xiaomi hired Qualcomm’s head of China operations to serve as its senior vice president of strategic cooperation.  Xiaomi was also recently reported to have acquired the licenses to create its own ARM-based processors. ((Xiomi Is Important To Qualcomm, Seeking Alpha, August 31, 2015)) Clearly, the move seems to be afoot, even in the absence of company confirmation.

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Why is Xiaomi an important customer for Qualcomm?

In 2014, Xiaomi overtook Apple to become the largest smartphone vendor in China. [1] Owing to slowing economic growth in the region, China’s smartphone market declined for the first time in Q2 2015 (by 4% year on year). Nevertheless, China is still the largest smartphone market and accounts for almost 30% of the global smartphone sales. As per research firm IDC, Xiomi is currently the fourth largest smartphone vendor in the world, accounting for 5.6% of global smartphone sales.

If sources are to be believed, Xiaomi will continue using Qualcomm’s Snapdragon processors for its high-end models. But it is a possibility that Xiaomi might start designing its own chipsets even for the high-end range in the future. Additionally, growing demand for low-end smartphones in emerging economies (mainly Asia and Latin America) is expected to be the primary growth driver for smartphone sales. Thus, Xiaomi using its own chips in the low-tier and mid-tier segment will serve a major blow to Qualcomm’s plan of expanding its footprint in the segment.

Xiaom revealed its ambitious expansion plans across Asia and Latin America, in 2014. Last month, the company started selling its smartphones in Brazil, marking its entry in Latin America.

Qualcomm’s top line has grown at a CAGR of over 20% in the last five years. However, rising competition (from HiSilicon, Intel, MediaTek, Marvell, Samsung and others), the exclusion of its application processor from Samsung’s new Galaxy S6 smartphone (due to some overheating issues), and regulatory investigations in China, the U.S. and Europe, have all slowed the company’s growth momentum in the last few quarters. Qualcomm paid $975 million earlier this year to settle the regulatory investigation by China’s National Development and Reforms Commission (NDRC) for alleged monopolistic practices in the region. While the settlement helped clear the uncertainty around Qualcomm’s business in China, the company is still suffering from heightened competition in the premium-tier segment, as well as continued under-reporting by certain licensees in the region.

We currently forecast Qualcomm’s mobile chipset market share to decline to less than 70% by the end of our review period. However, if the company’s share declines to 50% there could be a 10% downside to our current valuation for Qualcomm.

Our price estimate of $65 for Qualcomm is approximately 15% above the current market price.

See our complete analysis for Qualcomm stock here

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Notes:
  1. Apple arch-rival Xiaomi is now China’s biggest smartphone seller, Business Insider, February 17, 2015 []