Qualcomm’s (NASDAQ:QCOM) prices for mobile phone chips have declined in the past few years from around $22 in 2005 to around $18 in 2009 by our estimates.  We expect this downtrend to continue, albeit at a moderate rate, which should spur sales growth as mobile phone prices decline.
We see two other factors that could lead to lower prices than we currently estimate: 1) rising competition from players like Broadcom (NASDAQ:BRCM), Texas Instruments (NYSE:TXN) and Infineon Wireless, which is owned by Intel (NYSE:INTC), and 2) new chips designed for lower price points to tap emerging markets demand.
Mobile chipset pricing is a crucial driver for Qualcomm since mobile chipset sales account for around 45% of Qualcomm’s stock price based on our estimates. Though we estimate modest declines in coming years, the average forecast of Trefis members is more optimistic and predicts prices will remain close to 2009 levels.
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The average Trefis member estimates correspond to 6% upside from the current Trefis price estimate of $49.93, which is just slightly above Qualcomm’s current market price.
Lower Chipset Prices to Spur Mobile Phone Sales
Qualcomm earns revenue from chipset sales as well as through royalties. If Qualcomm reduces chipset prices, mobile phone makers like Nokia’s (NYSE:NOK) and Motorola (NASDAQ:MOT) can reduce mobile prices in order to stimulate demand for mobile phones.
According to IDC’s vendor share analysis for the worldwide mobile phone semiconductor market, the mobile chipsets market declined to $22 billion in 2009 from $23.6 billion in 2008, the first year-over-year decline in revenue growth since 2001.  This was driven by the global economic slowdown and makes it even more relevant for Qualcomm to reduce prices to maintain sales.
Qualcomm is also spending heavily on research and development (R&D) to make less expensive chips, primarily for emerging markets. According to a report in R&D magazine, Qualcomm plans to set up an R&D center in Taiwan to help it tap China’s growing market.  Qualcomm is also working toward creating a new data exchange format that could be critical for supporting 3-D chips. 
Competition is Rising
Although Qualcomm maintains a safe lead in chipsets revenues, other companies are pushing into the CDMA/WCDMA market. Infineon is forging strong relations with OEMs based on its acquisition by a bigger brand Intel. Broadcom’s baseband revenue grew 245% in 1H 2010 compared to same period a year ago propelled by its design wins at Nokia and Samsung. 
The average forecast of Trefis members for CDMA mobile chips rises from $16.80 in 2010 to $17.40 by the end of the Trefis forecast period compared to the baseline Trefis estimate of a decrease from $16.30 in 2010 to $15.30 over the same period. This implies 6% potential upside might exist to the current Trefis price estimate of $49.93 for Qualcomm’s stock.Notes:
- We’ve calculated CDMA Mobile Phone Chipset Pricing as: (Mobile Phone Chipsets Revenues) / (CDMA Chipsets sold). Qualcomm reports both Mobile Phone Chipsets Revenues and CDMA Chipsets sold in its SEC filings. [↩]
- IDC Press Release: Worldwide Mobile Phone Semiconductor 2009 Vendor Shares [↩]
- R&D Magazine Press Release: August 31, 2010 [↩]
- Press Release: Qualcomm defines format for 3-D chip stress [↩]
- Strategy Analytics: Cellular Baseband Market Showed Healthy Growth in 1H 2010 [↩]