Quick Thoughts: QCOM – In the Right Place at the Right Time


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–        Gainsaying the naysayers, QCOM sees double digit growth in 3G/4G handsets with surprisingly stable ASPs for the next few years – driving chip opportunity and royalty collections.

–        Snapdragon is the undisputed SoC leader, dominant in flagship smartphones while taking share in the hot low end and in tablets. Increasing modem complexity points to more success ahead.

–        QCOM will increase its share of device BOM with new products, while explosive wireless data growth creates big opportunities in adjacent markets – e.g. auto, home, wearables, etc.

–        Market growth, share gain, expanding addressed content, and adjacent opportunities make guidance for a 5yr 10%+ sales CAGR a floor, while margin expansion suggests faster EPS growth.

Coming off of a fiscal year where it broadly surprised with 30% revenue growth, Qualcomm was brimming with confidence at its annual analyst conference. The message was simple: 1) The wireless device market will remain strong, generating royalty growth and semiconductor opportunity far into the future; 2) Qualcomm can take even more market share and address an ever larger piece of the content of devices based on its widening technology advantages; and 3) New opportunities in adjacent markets, like automotive, home automation, wearable technology, and ultrabooks, are increasingly available to Qualcomm. In this context, management’s guidance for “double digit” top-line and bottom-line average annual growth over the next five years seems quite conservative.

Unlike most of its licensees and chip customers, Qualcomm has no exposure to the large but dying market for GSM feature phones, so, for it, the global shift to 3G/4G smartphones is all gravy. Almost 4 billion wireless subscribers are still GSM only, so there is a lot of runway left. While investors continue to fret that the average selling price of a smartphone is dropping like a stone, and will take royalty payments and chip prices down with it, Qualcomm has actually seen rising ASPs in the market and projected relative stability over the next few years. Management also explained, for the umpteenth time, that its patent position in 4G is as strong as its position in 3G, and this time offered the data point that if its existing licensees had paid for their 3G multimode devices at the same rate that had been negotiated for single mode 4G, their royalties would have been just 5% lower. This point may be comforting to royalty rate worrywarts, even though it will be many years before more than a tiny portion of global devices are 4G only with no 3G support rendering it moot.

On the chip side, Qualcomm has been kicking butt and taking names, with its Snapdragon SoC products winning almost every important non-Apple flagship smartphone announced in the last year. Snapdragon delivers clearly superior performance, while drawing less power, taking up less space, and integrating more functions than ANY other solution, advantages that may be insurmountable for rivals going forward. To its existing mastery of the baseband modem, QCT has added a uniquely powerful radio (RF) solution that can address an unprecedented 40 different frequency bands for the various flavors of 3G and 4G-LTE technology. As the global spectrum map grows ever more complex, the RF 360 gives Qualcomm yet another powerful weapon vs. its rivals.

At the low end, from whence most of the market growth is coming, Qualcomm has grabbed market share with most of the market leaders in China and India, beating would-be rivals MediaTek and Spreadsrum on their own turf. The design advantages that have driven QCT’s leadership at the high end – smaller dies, lower power, greater integration – will also play at the low end, allowing strong cost/performance in turnkey chipset solutions. Scale is another considerable advantage, as is Qualcomm’s support in designing products for export into developed markets.

As noted, Qualcomm has already entered the RF market with a splash, announcing that it had 50 design wins for its RF 360 products, including 15 devices already selling. This co-opts another 5% of the BOM for the typical smartphones into Qualcomm’s sphere of influence. The earlier acquisition of Aetheros and its WiFi solutions was another land grab, hastening the integration of the functionality into the baseband modem and sounding a possible death knell for Broadcom’s market leading stand-alone WiFi products. Longer term, the opportunity is there for Qualcomm to address the growing range of sensors finding their way into mobile devices.

Finally, Qualcomm is looking to bust out of smartphones. After stumbling out of the gate in the tablet market, the Snapdragon SoC line gained the high ground in the last 6 months, showing up in high profile products like the new Nexus 7, the Kindle Fire HD, the Nokia 2520, the Sony Xperia Tablet Z, and the Samsung Galaxy Tab 10.1 and leaving Apple’s iPad and Microsoft’s Surface as the only big name tablet lines without Qualcomm inside. Winning devices that often do not have cellular modems is a clear testament to the strength of QCT’s Krait CPU and Adreno GPU designs. Qualcomm believes it can lever its performance advantages into future wins in a variety of other device types, including laptops, connected home devices, automobiles, small cells, and wearables. As we move closer to the “internet of things” and the 25 billion connected endpoints that are predicted by some pundits, Qualcomm’s addressable market stands to increase substantially.

If Qualcomm is right on the details – the smartphone market continues double digit growth, Qualcomm takes further share and expands its content in each device, and it can successfully take leadership in adjacent markets, like tablets – then management’s assertions of double digit annual revenue growth over the next 5 years could be a significant understatement. Add in the promise of rising margins as operating expense growth lags the top-line, and Qualcomm’s earnings growth could prove to be quite spectacular indeed.

For our full research notes, please visit our published research site.

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