HTC recently revised its fourth quarter revenue forecast lower for the second time in less than a month sending its shares plunging in the Taiwanese stock market. The company had already lowered its smartphone sales forecast for the coming quarter and guided for a flat quarter-on-quarter revenue growth at best during its earnings call on October 31st. But now, the company feels that it may not be able to achieve the lowered target and has now cut its forecast by as much as 23% despite the ongoing holiday season that usually sees smartphone makers post their best sales. It seems the company has started to feel the effects of increasing competition in the smartphone market from rivals such as Samsung and Motorola (NYSE:MMI) that base their phones on Google’s (NASDAQ:GOOG) Android software as well as the marauding Apple (NASDAQ:AAPL) iPhone and the upcoming Nokia (NYSE:NOK) Lumia.
It may also be possible that the broader smartphone market is suffering due to the economic uncertainty that the U.S and European markets are facing. But that doesn’t seem to be the case if we look at the optimism surrounding some of HTC’s rivals. Samsung, which also makes Android-based smartphones, announced earlier this week that it is seeing good demand for its Galaxy S series and is now aiming to beat its 2011 smartphone sales estimates.  Apple’s recently launched iPhone 4S has also done extremely well, selling over 4 million in the opening weekend itself. So, it seems more likely a case of HTC losing market share to its rivals than the broader smartphone market under-performing.
HTC losing market share, though good news for its smartphone rivals, could be a big cause of concern for Qualcomm (NASDAQ:QCOM) that manufactures the chipsets that HTC uses in most of its smartphones including the Nexus One, the Droid Incredible, the Sensation and the Thunderbolt. Qualcomm and HTC have had a long associating dating back to 2001 when Qualcomm made a small minority equity investment in HTC. Since then, HTC has mostly stuck with Qualcomm solutions for its products and so we find a majority of its current smartphones powered by the Snapdragon processors.
Qualcomm’s diversity of vendors will save it
However, Qualcomm’s chipsets are used in a host of other smartphones including the iPhone 4S and Samsung’s Galaxy S smartphones. Among recent Samsung smartphones that use Qualcomm’s chips are Samsung Sensation, Samsung Focus, Samsung Focus S, Samsung Galaxy S Plus and the T-Mobile Samsung Galaxy S II, all of whom sport the Snapdragon processor. Apple has also standardized its baseband processors on Qualcomm’s chipsets for the iPhone 4S, signalling a complete shift from Infineon to Qualcomm. (see Qualcomm Gets Big Win Over Infineon with iPhone 4S) We believe this design win for Qualcomm will allow it to push its next-generation LTE chipsets for use in Apple’s next-generation mobile devices. (see Qualcomm’s Next-Gen Chips May Help Apple Launch LTE Devices Next Year) Also, Nokia has used Qualcomm’s chips for the first time in its new Lumia line of smartphones, which shows a growing acceptance of Qualcomm’s chipsets in the industry.
Qualcomm’s exposure to a diverse group of smartphone makers should decrease the risk of one of them, in this case HTC, not performing well. Sure, HTC’s smartphones use fully enabled members of Snapdragon chip family unlike others such as the iPhone 4S that uses only Qualcomm’s baseband processors on top of its own A5 application processor. But, as long as Qualcomm’s chipsets continue to be used across handset vendors and as the smartphone market grows, Qualcomm will make up any loss in revenues from one vendor elsewhere. So, unless we get indications of a slowdown in the broad smartphone market, Qualcomm’s investors have little to worry about.
We maintain our price estimate for Qualcomm stock at $62, which is about 18% above market price.Notes:
- Samsung aims to beat 2011 smartphone sales estimates, November 29th, 2011 [↩]