Is Qualcomm Making A Mistake By Exiting Server Market?

by Trefis Team
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Last month, Bloomberg reported that Qualcomm (NYSE:QCOM) was mulling an exit from the server business, either shuttering the operations or selling them to another company. There have also been reports that the head of the company’s data center business has left the company. Qualcomm’s change in plans appears somewhat surprising, considering that it only began commercial deployment of its first ARM-based server processor called the Centriq 2400 last fall, in a bid to diversify its revenue streams beyond the mobile device market. In this note, we take a look at what could have prompted the change in plans and what Qualcomm could be missing out on if it exits the space.

We have a $63 price estimate for Qualcomm, which is marginally ahead of the current market price. View our interactive dashboard analysis on Qualcomm’s expected performance over 2018 to see our forecasts and valuation estimate.

Why Does Qualcomm Want Out?

Qualcomm has been muted about its agenda for the server space since the launch of Centriq late last year, and there could be a couple of reasons for this. Firstly, the company promised to slash about $1 billion in costs from non-core product areas to improve profitability as part of its efforts to thwart Broadcom’s hostile acquisition attempt. While the takeover has since been stopped by the U.S. government on national security grounds, it’s still possible that Qualcomm is looking to save the cost of designing complex and expensive server chips. Moreover, building a strong presence and gaining market share in the server market involves a lot of heavy lifting, and this can take time. As Qualcomm is working with ARM architecture commonly used in low-power applications, rather than the x86 used by Intel, developers would need to write drivers for new hardware, besides building OS-level support for the hardware, while investing time in optimization.

What Could It Be Missing If It Exits?

That said, if Qualcomm is indeed abandoning its server plans, it could be missing a significant opportunity. While volumes for server chips are smaller than volumes in the mobile and PC space, prices are higher (the Centriq is priced at close to $2,000) and profit margins are also thicker. Intel practically controls the entire market for server processors (over 99% share) and data center operators have been seeking a competitive alternative that would give them more choice while driving prices lower. Qualcomm is one of the few companies with the financial wherewithal and R&D muscle to take on Intel head-on in this market. Moreover, Qualcomm is heavily reliant on the slowing mobile device market, and a bet on servers would have allowed the company to diversify, and capitalize on the growth in areas such as cloud computing and machine learning.

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