Qualcomm (QCOM) Supported by Increase in CDMA Penetration Rates
Qualcomm (NASDAQ:QCOM) is a developer of CDMA mobile phone technology used in about 40% of the 1.2 billion mobile phones sold worldwide by companies like Nokia (NYSE:NOK), Samsung, Motorola (NYSE:MOT) and Apple (NASDAQ:AAPL).
In a previous article we discussed how Qualcomm’s royalty rates will continue on their declining trend; however, it is not all bad news for the chip maker which is expected to benefit from rising CDMA penetration amongst mobile phones.
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Qualcomm makes money from every new CDMA-based mobile phone sold and its business depends on the number of CDMA mobile phones sold. Qualcomm has two primary revenue streams (i) selling CDMA chipsets to mobile phone makers (ii) collecting royalties on CDMA technology used by mobile phone makers.
The company made about $6.4 billion in revenue from chipset sales in 2009 and about $3.5 billion in revenue from royalties. We estimate that Qualcomm’s chipset and royalties businesses together constitute about 70% of Qualcomm’s value.
Despite slower than expected increases in CDMA penetration in 2009 we still expect about 65% of mobile phones sold to incorporate Qualcomm’s CDMA technology by the end of our forecast period. You can see below how there could be a 20% upside to Qualcomm’s stock if CDMA penetration rates were to reach 90% as well as a 20% downside if penetration rates were to remain flat at 40%.
65% CDMA Penetration of Mobile Phones Sold
We estimate that Qualcomm’s penetration in CDMA phones sold increased at a slower rate than we expected to about 40% in 2009, up from about 39% in 2008. We estimate that Penetration of CDMA in Mobile Phones Sold will increase to about 65% by the end of Trefis forecast period compared to our earlier estimate of about 68%.
Many of the 3G mobile phones sold in emerging markets like India and China are based on Qualcomm’s CDMA technology which makes 3G adoption an important driver of CDMA penetration. Qualcomm’s 3G CDMA technology is an upgrade to 2G and 2.5G CDMA technologies that promises faster data (internet, text) speeds. In addition, 3G CDMA competes with alternatives like GSM’s EDGE, UMTS and WiMax which are all different implementations of 3G standards.
The lower than expected increase in CDMA penetration in 2009 can be attributed in part to slower adoption of 3G CDMA mobile phones in developing countries. Mobile phone carriers in India and China are increasingly offering 3G CDMA service and over time this will lead to higher sales of CDMA rather than GSM mobile phones.
In addition to CDMA mobile phones, there is a growing market for other types of consumer electronics that use 3G. We believe that an increasing number of devices like smartbooks, e-book readers and PDAs will incorporate 3G, providing more opportunities for Qualcomm’s technologies.
You can modify our forecast for CDMA phones penetration above to see how much Qualcomm’s stock is impacted by changes in CDMA penetration. For example, by modifying our forecast to reach 90% by the end of the forecast period, you can see how there would be a 20% upside to the current Trefis price estimate for Qualcomm.