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Investment Overview for Qualcomm (NASDAQ:QCOM)

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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 to decline from $20.50 in 2017 to approximately $17 by the end of Trefis forecast period, due to increasing competition and exposure to emerging markets. There could be a 8% upside to the Trefis price estimate if higher priced chipsets help Qualcomm maintain the average pricing at $20 till the end of the forecast period. On the other hand, if Qualcomm's chipset pricing declines at a faster rate and reaches $12 by the end of our forecast period, there could be approximately 10% downside to the Trefis price estimate.


• Qualcomm Chipset Shipments: We currently forecast Qualcomm's chipset shipments to increase from 800 million in 2017 to about 880 million in 2024. Qualcomm has aggressive plans to tap emerging markets like China and India for 3G/4G rollout. Also, it was the first player to come out with a multimode chipset for LTE technology. However, Qualcomm is seeing increased competition from other chipset makers. The company's chipset business is also threatened by its own customers like Samsung, Apple and Xiaomi, as the smartphone makers plan to develop in-house chipsets to improve margins. If Qualcomm's MSM shipments decline to about 770 million by the end of our review period, there could be a 10% downside to our price estimate.

Mobile Device Royalties

• Royalty Rate: We currently forecast that Qualcomm's royalty revenues will decline from levels of around $6.5 billion in 2017 to about $4.5 billion in 2024. Royalty rates have come under pressure as Qualcomm expands its business to emerging markets, which command lower rates. Another reason for the expected decline in royalty rate is Qualcomm's not so strong patent position in 4G technology as compared to 3G. However, if Qualcomm is able to maintain these revenues at current levels by building a strong position in 5G, while fending off lawsuits relating to the patent licencing business, there could be a 10% upside to our current price estimate.
  

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.

Ongoing Lawsuits Against Qualcomm

The various ongoing lawsuits against Qualcomm has raised serious doubts about the sustainability of the company's licensing business. Recent lawsuits filed against Qualcomm include:

- A $1 billion lawsuit filed by Apple alleging that Qualcomm overcharged it for chips and refused to pay rebates worth $1 billion. Apple also alleged that Qualcomm attempted to persuade it to provide false information to the Korea Fair Trade Commission (KFTC) in order to get the rebates. Apple is withholding royalty payments that its contract manufacturers owe Qualcomm until its current legal issues are sorted out.

- U.S. Fair Trade Commission (FTC) initiated a lawsuit against Qualcomm, alleging that certain monopolistic business practices of the company were in violation of the Fair Trade Commission Act of 1914, in which basic US patent law was first set down.

- KFTC alleged Qualcomm abused its market dominance and slapped an approximate $850 million fine on the company. Furthermore, the KFTC issued a broad set of guidelines that Qualcomm will have to follow while executing licensing contracts in South Korea subsequent to the formal filing.

Though Qualcomm strongly disputes these charges, there can be significant negative implications for the company if its appeal gets rejected. Qualcomm is confident of navigating these challenges in time and has taken several steps to address the matters.

Acquisition of NXP Semiconductors

Qualcomm announced its intentions of acquiring NXP Semiconductors, a leading provider of High-Performance Mixed Signal (HPMS) and Standard Product (SP) semiconductor solutions in late 2016. NXP focuses on designing high-performance devices used in automotive (36% of revenues), secure identity (9%), secure connectivity (22%), secure interface and infrastructure (18%) applications. Standard Products (13% of revenues) comprise and range of basic circuits, including diodes, thyristors, rectifiers, and transistors. The company manufactures the bulk of its products and possesses a range of CMOS, radio-frequency, mixed-signal and analog process capabilities.The NXP acquisition would significantly diversify Qualcomm’s offering and provide it an entry into multiple markets outside its core mobile chipset business, especially automotive.

As more and more customers look for improved digital experience in the car, in addition to other parameters, car companies are banking on technological advancements in their interiors to compete with each other. This has led to an exponential increase in the semiconductor content per vehicle. According to research by Boston Consulting Group, the autonomous car market could be a $42 billion market by 2025, which could be around 12-13% of the total auto market.

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3G to 4G LTE transition

LTE, which stands for Long Term Evolution, is the 4G technology that will enable faster data transmission speeds to mobile devices. Verizon, which is in the process of upgrading its network to LTE, claims that the technology is capable of peak download speeds of 40 to 50 Mbps and peak upload speeds of 20 to 25 Mbps. This transition is speeding up especially in developed markets such as the U.S., where all the national carriers are laying out LTE networks. 

In this regard, Qualcomm is leading the LTE transition, having started the commercial production of multimode chipsets that enable mobile phone users to transition from 3G to LTE technology. Moreover, it was the first player to successfully integrate a LTE chipset on its application processor. This addresses the widespread concerns that LTE handsets are not only bulkier but also hog much more power.

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 Entry 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 is scheduled to launch in calendar Q4 2017.

The top companies that drive the data center market are encouraging the rise of alternate sources and we believe that Qualcomm is well-positioned to gain from that. With the growth in the number of data-centers, there is an increasing requirement to manage the energy consumption from these data centers. Qualcomm can utilize its experience in making power efficient mobile phone chipsets in designing power efficient server chipsets. The company is one among the few of the top-tier ARM licensees that hold both architectural and core licenses from ARM. In November 2017, the company began commercial deployment of its first ARM-based server processor called the Centriq 2400.

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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