Scenarios That Can Change Our Valuation For Qualcomm

-12.38%
Downside
167
Market
146
Trefis
QCOM: Qualcomm logo
QCOM
Qualcomm

Qualcomm (NYSE:QCOM) develops and patents communication technologies, such as CDMA and OFDMA, which it then licenses to device manufacturers that use its technology. The company is also a leading developer and supplier of integrated circuits and system software based on CDMA and OFDMA technologies. Qualcomm’s licensing (QTL) and chipset (QCT) segments constitute around 46% and 30% of our valuation for the Qualcomm, respectively. Below we discuss key scenarios related to these drivers that present upside or downside opportunities to our current price estimate for the company:

Mobile Devices Chipsets Pricing: We currently forecast Qualcomm’s chipset pricing to decline from $18 in 2015 to approximately $15 by the end of our Trefis forecast period. This is mainly because we believe that to compete effectively with its competitors, the company might have to lower its chipset prices going ahead. The company is facing stiff competition from MediaTek and Apple that have around 20% market share in the application processor market. Furthermore, Qualcomm is exposed to the risk it could lose market share to Chinese companies that have started manufacturing their own chipsets. Furthermore, the company is likely to face pricing pressure in emerging markets such as China and India that are fast transitioning from 3G and 4G. However, there could be 10% upside to our price estimate, if higher priced chipsets in premium smartphones help Qualcomm maintain the average pricing at $18 till the end of the forecast period.

Royalty Rate Charged By Qualcomm: We currently forecast that Qualcomm’s royalty rates for mobile devices will decline from an estimated 3% in 2015 to 1.9% by the end of the Trefis forecast period. Our primary reason to believe that Qualcomm might have to lower its royalty rate going ahead is the rising number of lawsuits against the company globally for basing its royalty fee on the price of the final product. Another reason for the expected decline in royalty rate is Qualcomm’s not so strong patent position in 5G technology as compared to 4G.

Relevant Articles
  1. Will Qualcomm Stock Return To Pre-Inflation Shock Highs Of $189?
  2. Will Qualcomm Stock Return To Pre-Inflation Shock Highs Of $190?
  3. With Expectations Low For Q4, Will Qualcomm Spring A Surprise?
  4. Will Qualcomm Stock Return To Pre-Inflation Shock Highs Of Over $180?
  5. Will Qualcomm Stock Recover To Highs Seen Prior To Inflation Shock?
  6. Can Qualcomm Count On Automotive Sector To Drive Its Next Wave Of Growth?

In 2015, Qualcomm agreed to pay China’s National Development and Reforms Commission (NDRC) $975 million in fines for alleged monopolistic practices in the region, in February 2015. As a part of the settlement with NDRC, Qualcomm has agreed to ease its royalty rate regimen for Chinese vendors. The company is facing similar charges in South Korea too. If Qualcomm were to lose its case in South Korea, it faces the risk of lowering its royalty rate as it might have to base its royalty fee on the average selling price of a chipset instead of 3G/4G device price.

However, the existing disputes can take years to settle and the company might continue to enjoy higher royalty rates until then. Further, the expanding 3G and 4G penetration in emerging markets can counter the negative impact of declining royalty rates for Qualcomm upto some extent. There could be an approximate 10% upside to our price estimate if Qualcomm is able to retain its current royalty rates over our forecast period.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology