Will Qualcomm Gain from Pending Wave of Cheap Smartphones?
According to some recent reports like one from Wedge Partners, the biggest trend of the decade could be the pending wave of “low cost smartphones.” [1] The global acceptance of low priced Google (NASDAQ:GOOG) Android phones could be one of the first waves of cheap smartphones as well as older version of Apple’s (NASDAQ:AAPL) iPhone like the 3GS. Microsoft (NASDAQ:MSFT) and Nokia’s (NYSE:NOK) partnership has the ability to facilitate this trend as well.
However, the most interesting aspect of this finding was how Qualcomm (NASDAQ:QCOM) could gain from all this. Qualcomm would benefit from the higher smartphone chipset sales; however, the offsetting factor is that the rapid decline in smartphone prices will hurt royalty revenues for Qualcomm. Chipsets and royalties are equally important for Qualcomm and account for almost 40% of our $59 price estimate for Qualcomm stock. Our price estimate is about 20% above market price.
Possible implications on Qualcomm stock
According to the Wedge report, Qualcomm could sell 150 million chipsets per quarter in the next year to total around 600 million in 2012. We have collated our estimates in the above chart where we expect Qualcomm to sell around 570 million chipsets next year. In terms of market share, we expect Qualcomm’s chipsets market share to decline to around 62% in 2012.
To sell 600 million chipsets, Qualcomm’s market share will need to be 65% by next year, and this scenario would provide upside of only 2% to our $59 price estimate for Qualcomm stock. However, the main thing to watch out for will be how the growth of low end smartphones will impact the average pricing of the mobile phones based on Qualcomm’s technology.
Qualcomm earns a royalty rate of around 3.5% for every mobile phone that is sold that uses its technology. If mobile phone prices decline at a faster rate than our estimates of an average of 4% annually, any upside from higher chipset sales would be nullified. What do you think?
You can test this scenario yourself by tweaking above charts.
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See our complete analysis for Qualcomm stock here
Notes:- Apple, Nokia, Google In Race For Cheapo Smartphones, Barron’s quoting Wedge Partners as the source, August 18th, 2011 [↩]