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Investment Overview for Qualcomm (NASDAQ:QCOM)

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Settlement with Apple

In April 2019, Qualcomm and Apple reached a settlement on their two-year-long licensing dispute. With the deal, the two companies agreed to dismiss all litigation worldwide. Separately, Apple forged a six-year agreement to license Qualcomm’s patents, effective from April 1, 2019, with a two-year option to extend. Apple also signed a multiyear chipset supply agreement with Qualcomm.

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Below are key drivers of Qualcomm's value that present opportunities for upside or downside to the current Trefis price estimate for Qualcomm:

Mobile Device Chipsets

• Qualcomm Chipset Pricing: We currently forecast Qualcomm's chipset pricing will increase from around $20 in FY'18 to about $25 by FY'25, as the upgrade to 5G networks could call for more advanced modems and SoCs. However, there could be a downside of 15% to our price estimate if ASPs remain stagnant at levels of about $20. On the other hand, there could be an upside of 10% if ASPs rise to $28 by the end of our review period.
  


• Qualcomm Chipset Shipments: We currently forecast Qualcomm's chipset shipments to increase from 720 million in FY'19 to about 880 million in FY'25, as Apple will resume its use of Qualcomm modems after dropping the company on its FY'18 flagship devices. Moreover, higher sales of OEMs in China could also help the company scale-up SoC sales. However, if the metric remains almost flat over the long-run, there could be a 10% downside to our price estimate.
  

Mobile Device Royalties

• Royalty Rate: We currently forecast that Qualcomm's royalty revenues will grow from a projected $7 billion in FY'20 to about $8.5 billion in FY'25, driven by its strong position in 5G as well as its move to work with Chinese manufacturers. However, if revenues remain flat over the long-run, due to litigation or other pressures, our price estimate could decline by about 8%.

For additional details, select a driver above or select a division from the interactive Trefis split for Qualcomm at the top of the page.

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Qualcomm is a leading developer of Code Division Multiple Access (CDMA), a mobile device technology that facilitates communication between mobile devices and wireless towers.

Qualcomm makes money by selling chipsets for mobile devices, tablets and femtocells. It sells chipsets to mobile device manufacturers such as Apple, Samsung, Nokia and Motorola Mobility; and charges a royalty to mobile manufacturers on every device sold that incorporates its technology. The royalty charge is typically determined as a percentage of the selling price of the mobile device.

Qualcomm also licenses its CDMA technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers. In addition to licensing fees, the company also collects a royalty on every CDMA handset sold from the handset manufacturers. The company believes that competitive pricing and widespread availability of CDMA chipsets will encourage wider adoption of CDMA within mobile devices and will increase the size of its royalty base.

Qualcomm also licenses OFDMA protocols on which LTE/WiMax technology is based.

Our financial model is based on Qualcomm's fiscal year, which ends in September.

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Qualcomm derives over 80% of its valuation from its mobile licensing and mobile chipset business.

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4G to 5G transition could open up opportunities

The wireless industry is beginning to transition from 4G to 5G, and Qualcomm appears to have an early lead in this space, launching its X55 5G modem in early 2019. While the transition to this technology could benefit Qualcomm's licensing business, the chipset operations could stand to gain more in the interim, as 5G devices generally require a tighter coupling between the various components, potentially enabling Qualcomm to sell more related components including power amplifiers, filters, RF transceivers, and antenna tuners to OEMs.

Battle of Smartphone Application Processors

Qualcomm’s Snapdragon is extensively used in Android-based smartphones and Microsoft’s Windows Mobile smartphones, while the latest Apple iPhone uses an A7 processor. Qualcomm’s Snapdragon also competes with Samsung's Exynos and Intel's Atom processors in the smartphone application processor market.

Pressure on Qualcomm Royalty Rates

Qualcomm charges royalties on each mobile device sold based on its technology, and one-time licensing fees from mobile chipset vendors to use its proprietary technology. Royalty rates have always been a debatable issue; and the tussle between mobile device vendors and Qualcomm has escalated, as is evident from an increasing number of lawsuits against Qualcomm. The company is currently facing regulatory investigations in the U.S. and Europe.

After a year-long battle, Qualcomm last year agreed to pay China’s National Development and Reforms Commission (NDRC) $975 million in fines for alleged monopolistic practices in the region. China is a major source of growth for Qualcomm’s 3G/4G LTE chipsets.

As part of the settlement with NDRC, Qualcomm has agreed to ease its royalty rate regimen for Chinese vendors. Under the terms of the agreement, Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents, widely used by Chinese device makers, separately from other patents. For companies opting for the new agreement, which applies to phones sold for use in China, Qualcomm will calculate royalties based on 65% of the phone’s selling price, instead of on the whole price. Lowering its royalty rates in China could affect the Qualcomm's licensing deals elsewhere, forcing the company to reduce its royalty rates globally.

Moreover, with LTE catching on in many developed markets, there could be a negative pressure on royalty rates that Qualcomm charges as it doesn't have as strong a presence in OFDMA patents as it does in CDMA.

Increasing Availability of Mobile Broadband and Mobile Applications

The increasing availability of mobile high speed data access creates opportunities for Qualcomm to provide mobile device software applications that utilize its technology.

The company also developed Firethorn, which is a banking application that can be used on mobile phones for secure banking transactions.

New Opportunity Emerging in the Small Cells Market

The small cells market is expected to experience significant growth over the next few years, as more and more users abandon landline connections in favor of mobile phones and demand for better network coverage surges. Competition has been shaping up well with Broadcom entering the fray with its acquisition of Percello, a semi-conductor start-up that specializes in femtocell design. Recognizing the immense potential of this market, Qualcomm has also beefed up its efforts as evidenced by the announcement of its collaboration with Samsung to deliver small cells supporting LTE in unlicensed spectrum.

Qualcomm's Interest In The PC & Datacenter Market

Qualcomm has been trying to gain a foothold in alternate growth markets such as PCs and data center. Currently, both these markets are dominated by Intel, which commands a lions share of the market. Qualcomm recently collaborated with Microsoft to make Windows 10 compatible on mobile computing platforms, and its Snapdragon 835 for mobile PC designs was launched in 2017, with the new Snapdragon 850 set to launch in 2018.

While Qualcomm began commercial deployment of its first ARM-based server processor called the Centriq 2400 in late 2017, the company has been muted about its agenda for the server space and there are reports that the company is mulling an exit from the server business, either shuttering the operations or selling them to another company.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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