Qualcomm (NASDAQ:QCOM) competes with players like Broadcom (NASDAQ:BRCM), Marvell (NASDAQ:MRVL), Infineon (now acquired by Intel (NASDAQ:INTC)) and Texas Instruments (NYSE:TXN) in the cellular baseband market. Qualcomm’s application processor named Snapdragon competes with Nvidia’s (NASDAQ:NVDA) Tegra processor and Texas Instrument’s OMAP 4 processor.
Qualcomm primarily makes money by selling mobile phone chipsets and earning royalties from licensing CDMA-based technology to mobile phone vendors like Motorola Mobility (NYSE:MMI), Samsung and LG. Qualcomm sells cellular basebands, which are the core chipsets used in mobile phones, to handle voice/data communication between wireless devices. The company also sells other chipsets used for power management, bluetooth connectivity and application processing.
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Lately, Qualcomm has started to concentrate its effort on tapping the fast growing tablet chipset market. Although it is too early to tell whether Qualcomm can generate the same level of success in tablet chipsets that it did in mobile phone chipsets, the tablet market’s fast growth potential does provide an opportunity to boost top-line revenues.
We estimate that mobile phone chipsets and royalties account for 39% and 37% of our $53.82 price estimate for Qualcomm stock. Our price estimate stands roughly 8% below market price.
Qualcomm Starting to Focus its Efforts on Tablet Chipsets
According to management, Qualcomm has more than 150 Snapdragon devices in development, including more than 20 tablets.  It also mentioned that it is designing a new dual-core chipset named MSM 8660 that would be well suited to both tablets and smartphones.
Another initiative that Qualcomm recently undertook was the acquisition of Atheros (NASDAQ:ATHR) to diversify its product portfolio beyond mobile phones. Qualcomm had previously lacked the product range (particularly in Wi-Fi chipsets) necessary for non-handset devices like tablets – Wi-Fi is an important component for PCs and tablets. The Atheros acquisition plugs this gap for Qualcomm (see our article Atheros Acquisition Provides Immediate Upside for Qualcomm Stock).
Tablets Expand Qualcomm’s Addressable Market
Success in tablet chipsets would tremendously expand the addressable chipset market for Qualcomm. Qualcomm’s addressable market has previously been centered around mobile phones, which we believe will increase from around 1.5 billion units in 2010 to around 2.1 billion by the end of our forecast period.
According to IDC, the tablet market is expected to grow from around 45 million units in 2011 to 71 million in 2012.  If the tablet market is able to sustain this level of growth over the long-term, it would imply a market size of 400 million units by the end of our forecast period. This would increase our end-of-forecast-period estimate for Qualcomm’s total addressable market from 2.1 billion units to 2.5 billion. This scenario could spur 15% upside to our $53.82 price estimate for Qualcomm stock.
We also note that Qualcomm’s Mirasol technology is featured in display panels for tablets, as well as smartphones and e-readers. This technology is designed to create a better viewing experience in various environments ranging from dim indoor lighting to the brightest outdoor sunlight. It can display color videos at fast speeds, is energy efficient and consumes less battery power than alternative options.Notes: