5% Upside to Qualcomm’s Stock from Faster 3G Adoption

Qualcomm (NASDAQ:QCOM) sells mobile chipsets and provides its CDMA mobile phone technology to companies Nokia (NYSE:NOK), Motorola (NYSE:MOT), Samsung and LG. Qualcomm mentioned in its recent quarterly earnings that 3G mobile phone adoptions could increase at a faster than expected rate as a result of high demand in emerging markets like China and India. Management has indicated that global 3G phones sold could reach 625 million in 2010, up 25% from the 500 million phones sold in 2009.

There could be an upside of 5% to the $42 Trefis price estimate for Qualcomm’s stock if higher 3G mobile phone growth rates were to materialize. Below we explain the importance of 3G technology, how 3G benefits Qualcomm, why 3G sales could grow faster than expected and how such growth could translate to a 5% upside to Qualcomm’s stock.

3G Technology Provides Faster Internet Access

3G mobile phone technology is based in large part on CDMA2000 and WCDMA protocols and is considered better than the traditional GSM technology. 3G provides faster internet access as well as increased network capacity and flexibility. According to Wireless Intelligence, a mobile market research firm, the number of 3G subscribers has surpassed worldwide has already surpassed 1 billion.

3G Adoption will Help Increase CDMA Mobile Phones Penetration

Since 3G is based primarily on CDMA technology, higher 3G sales will increase the number of CDMA mobile phones sold (the “CDMA penetration”), which will benefit Qualcomm. CDMA mobile phone penetration has increased from 28% of mobile phones sold globally in 2006 to 40% in 2009. We forecast that penetration will increase to 65% by the end of Trefis forecast period, implying slightly under 1.2 billion CDMA mobile phones sold.

Qualcomm owns significant portions of the intellectual property associated with CDMA and will benefit directly as a result of higher CDMA penetration.

3G Technology Adoption Benefits Qualcomm in Two Ways

1. Qualcomm is the market leader in CDMA mobile phone chipset market with a share of around 68% in 2009. 3G technology adoption increases the addressable market for which it sells chipsets. These chipsets are sold to mobile phone vendors like Nokia, Samsung and LG.
2. Qualcomm will earn higher CDMA royalty revenues, since it collects around 3.6% royalties from every CDMA mobile phone sold.

3G Adoption in China and India will Lead to Larger Addressable Market

China and India are two of the world’s largest wireless markets. China has around 800 million mobile phone subscribers, while India has around 500 million subscribers. China is in the final implementation stage for 3G adoption while 3G spectrum bidding has started recently in India. These events will increase the overall addressable market for Qualcomm.

5% Upside to Qualcomm’s Stock if Faster 3G Technology Adoption Happens

Based on Qualcomm management’s forecast that there could be 625 million 3G mobile phones sold in 2010, we estimate that 2010 CDMA mobile phone penetration could reach 48%, higher than the 45% we currently forecast. If CDMA penetration in 2010 is higher than we forecast and it were to continue increase in the outer years as we forecast, it could mean that 68% of mobile phones sold (or more than 1.2 billion) will be CDMA phones by the end of our forecast period.

The higher CDMA penetration forecast implies an upside of $2 (5%) to the $42 Trefis price estimate for Qualcomm’s stock. You can modify our forecast for CDMA mobile phone penetration above to see how Qualcomm’s stock will be impacted if it were to increase at a faster rate that what we forecast.

For additional analysis and forecasts, here is our complete model for Qualcomm’s (QCOM) stock.