Is The Worst Behind Qualcomm?

Leading chipset maker Qualcomm  (NYSE:QCOM) has been one of the worst performing technology stocks in 2015. The company’s stock fell more than 30% in 2015, owing primarily to the investor concerns surrounding the litigation charges on its business globally. Qualcomm’s licensing business that contributes around 70% to the revenues is under threat as the company might have to lower the royalty rates globally and pay heavy fines, as a result of the ongoing investigations. The other factors that weighed on Qualcomm’s stock in 2015 were under-reporting of sales by Chinese smartphone makers, inability to conclude new licensing terms in China, and the exclusion of Qualcomm’s Snapdragon 810 chipset from the Samsung Galaxy S6 premium smartphone.

Despite the ongoing challenges, we believe that Qualcomm’s fortunes should improve as the company’s investments in revolutionary technologies such as small-cell, Internet of Things (IoT) and 5G start to pay-off. Additionally, by achieving new licensing deals with major smartphone makers in China, Qualcomm seems to be overcoming a major hurdle that weighed heavily on its profitability in 2015. Furthermore, investors can have some respite if Qualcomm’s Snapdragon 820 chipset finds a place in Samsung’s upcoming premium smartphone – Galaxy S7. This will offset the doubts regarding the company’s Snapdragon chipsets, after the failure of Snapdragon 810 due to overheating issues early in the year. Below we take a look at each of these factors that can drive future growth of Qualcomm:

Our price estimate of $65 for Qualcomm is around 30% above the current market price.

See our complete analysis for Qualcomm stock here

Qualcomm Quickly Closing-In The Gap In China

Qualcomm seems to be over the hump in the large smartphone market in China, where it was struggling to decrease the under-reporting of sales and conclude new licensing agreements with Chinese OEMs. Some of the latest deals bagged by Qualcomm in China are with Xiaomi, Haier, QiKu and Tianyu Sign. ^[1] By concluding these agreements, Qualcomm should be able to improve its profitability in the coming quarters by collecting more royalties and licensing fees from these smartphone makers for using its 3G and 4G technology.

The most significant of these agreements is with Xiaomi, as the smartphone maker holds a top spot in the Chinese market and has plans to expand its presence to more international markets. ^[2] Furthermore, Qualcomm will have more gains because these smartphone makers may well pay royalties retrospectively, as was the case with other Chinese OEMs in fiscal 2015.

Huge Opportunity For Qualcomm In 5G, Internet Of Things (IoT) And Small-Cell Domains

We believe that the largest growth opportunities for Qualcomm over the next five to ten years are in the 5G and the Internet of Things (IoT) domains. While the global IoT market is expected to grow by more than $5 trillion over the next six years, 5G will be the broadest and most encompassing evolution of wireless technology ever with data rates requirement of 1 GBPS (Gigabits per second).

Furthermore, Qualcomm is poised to benefit from the growing adoption of small cell technology as an alternative or complement to macro-cells. Operators are struggling to support the surge in data traffic due to improved data rates from 3G and 4G LTE technologies and the growth in large number of connected devices. Small cell networks ease this problem by operating in unlicensed spectrum to offload mobile data for more efficient use of radio spectrum. The small cell network market is anticipated to grow from $1.96 billion in 2015 to $3.92 billion in 2020. ^[3] Qualcomm anticipated the market well ahead of time and has come up with Ultrason technology, which is a cost effective solution to deploy small cell on a large scale and unplanned deployment approach, where-in there is no need for detailed RF network planning and optimization.

We find Qualcomm building another economic moat around itself by investing in these high growth technologies, apart from its patent-licensing and chipset business. Moreover, the company is positioned advantageously to profit in these emerging industries. Qualcomm holds a large share of global wireless baseband revenue, and it makes sense to parlay its strong wireless technologies into IoT and 5G. With the acquisition of Cambridge Silicon Radio (CSR) in 2014, Qualcomm has fortified its position in the IoT market. CSR was a UK-based semiconductor company that made Bluetooth and wireless radio frequency devices (i.e., radios) for machine-to-machine communication.

Snapdragon 820 Can Be A Game Changer For Qualcomm In 2016

Qualcomm faced a huge setback in 2015 as its flagship processor Snapdragon 810 was dropped from the Samsung’s premium smartphone, the Galaxy S6, due to overheating issues. However, Qualcomm’s Snapdragon 820 Chipset, which is set to be launched in early 2016, can change the company’s fortunes. According to GSMArena, Snapdragon 820 chipset fares much better in terms of performance and other specifications compared to its predecessor.

Furthermore, there have been rumours that Qualcomm can find its way back into the Samsung’s upcoming premium smartphone – Galaxy S7. Given that, Samsung has the largest market share in smartphones and Galaxy S7 will be priced fairly higher than other smartphones, Qualcomm will be a clear beneficiary if these rumors come to be true, as the company charges royalties as a percentage of device sales price. This will also help rebuild confidence in Qualcomm’s Snapdragon chipsets, after the failure of Snapdragon 810 due to over heating issues.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Press release, Qualcomm, December 2015 [↩]
2. Apple’s biggest rival in China says it plans to start selling phones in the US, BusinessInsider, July 2015 [↩]
3. Small Cell Network Market, Marketsandmarkets, October 2015 [↩]