Is Snapdragon 820 Qualcomm, Inc. (NASDAQ:QCOM)’s Redeemer?
Qualcomm, Inc. (NASDAQ:QCOM) put up a fairly strong show in 2015, posting holiday quarter revenue and earnings that topped Wall Street estimates. The company also exited the year with a strong share of the LTE baseband chipset market at 65%, according to ABI Research. In 2016, the spotlight is on Qualcomm’s Snapdragon 820 processor. The question is, can it live up to expectation?
Revenue of $5.78 billion topped the consensus estimate of $5.69 billion but fell 19% YoY. Segmentally, QCT contributed about $4.1 billion of revenue and QTL generated $1.6 billion of revenue during the quarter. Cost curtailment combined with stronger QTL revenue saw EPS hit $0.97, comfortably beating the consensus estimate of $0.90. Qualcomm’s cash balance at the end of the quarter was $19.6 billion.
The chart below shows Qualcomm’s revenue trend for the last five quarters vs. cost of revenue:
Qualcomm, Inc. (NASDAQ:QCOM) guided F1Q2016 revenue in the range of $4.9 to $5.7 billion, which comes to $5.3 billion at the midpoint. But that pales in comparison with consensus estimate of $5.7 billion.
What’s exciting about Qualcomm?
Snapdragon 820 is Qualcomm, Inc. (NASDAQ:QCOM)’s updated chip that replaces the troubled Snapdragon 810. Qualcomm goofed with Snapdragon 810, partly because it hurried its commercial production. The result was Snapdragon caused devices to heat up and hampered performance. The problem cost Qualcomm dearly as key customers refused to use it in their flagship products. Samsung in particular settled ditched Snapdragon chips for its 2015 Galaxy S6 flagship smartphones.
However, there is light at the end of the tunnel as Snapdragon 820 comes to market. A number of major mobile device manufacturers have committed to use the chip in their 2016 flagship handsets. For example, Qualcomm has won back a portion of Samsung’s 2016 Galaxy smartphone sockets. Samsung will use Snapdragon 820 processor in Galaxy S7 line. It is expected that Snapdragon 820 chipset will sit inside Galaxy S7 smartphones for the U.S., Japan and China markets. Winning back Samsung is a major milestone for Qualcomm given that Samsung is one of its major customers. Qualcomm had lost the Samsung socket because of the bungled Snapdragon 810.
Other than Samsung, Sony Corp (ADR) (NYSE:SNE), HP Inc (NYSE:HPQ), Xiaomi and LG have also committed to put Snapdragon 820 in their flagship handsets for 2016. Sony will use Snapdragon 820 in Sony Experia, Xiaomi intends to use the chipset in its Mi 5 handset. LG will adopt the chip inside G5 and HP will put it inside its HP Elite X3 smartphone.
Displacing Intel: With Snapdragon 820, there are signs Qualcomm could displace Intel Corporation (NASDAQ:INTC) from some of the device sockets it currently holds. The fact that HP Elite X3 will feature Snapdragon 820 is a clear sign that Qualcomm is beginning to raid Intel’s stronghold – PC. The HP Elite X3 is a convertible handset that can be turned into a laptop or desktop computer. HP Elite X3 is sure to portray Qualcomm’s Snapdragon 820 as a mobile chip with PC-grade processing power and that threatens Intel’s territory.
Qualcomm exited 2015 with 65% of LTE chipset market share and that portion is likely to improve in the coming years. It is predicted that LTE market will grow at compound annual growth rate (CAGR) of 78.6% over the next four years. Qualcomm looks well-placed to ride the growth wave given its improved Snapdragon 820 chipset.
Expansion into new markets
Saturation in the smartphone market means limited sales opportunities for Qualcomm, Inc. (NASDAQ:QCOM) in the traditional mobile segment. Aware of the market shifts and keen to sidestep the challenges that comes with such shifts, Qualcomm is diversifying into new markets and it hopes Snapdragon will fuel its revenue stream diversification. Qualcomm is targeting are car, wearable, drone and virtual reality markets to drive growth beyond smartphones market.
Handset/network upgrade in emerging markets
As much as smartphone sales are cooling because of market saturation and economic slowdown, there still exist growth opportunities for Qualcomm. The company stands to benefit from the upgrade from feature phones to smartphones, especially in developing economies where many people still hold basic handsets. Additionally, Qualcomm stands to gain from mobile network upgrade to 3G and 4G LTE modes. However, the company will have to confront competitive pressure, especially in 4G mode given that it doesn’t have a strong technology portfolio there compared to 3G.
Time to reap investment benefits
The past few years have been characterized by growth-themed investments at Qualcomm, Inc. (NASDAQ:QCOM). The company particularly scaled up investment in R&D to drive product innovation and expand its intellectual property portfolio. After years of investment, it appears Qualcomm is starting to pick fruits of its labor. That suggests that there is a huge chance that costs will decline as margins improve in the coming years as Qualcomm cools R&D investment.
Financial impact of Apple socket
Qualcomm supplies some of the chips used in Apple Inc. (NASDAQ:AAPL)’s iPhones. The iPhone socket generates revenue in the neighborhood of $5 billion annually for Qualcomm. Although there have been chatters that Apple is working on its own wireless chips that could see Qualcomm lose the iPhone LTE socket, such a move will likely take time. In the meantime, Qualcomm can still benefit from iPhone sales. Although it is also worth mentioning that Apple predicts iPhone sales to be flat or shrink in the current quarter.
What’s worrying about Qualcomm?
Customers turning into competitors
You have heard the case of Apple developing proprietary modem chips for its iPhones. If the company pushes ahead with such plans, Qualcomm, Inc. (NASDAQ:QCOM) risks lose a huge revenue opportunity given that iPhone are among the top-selling smartphones globally. But it is not Apple alone, Samsung, Xiaomi and a number of other smartphone manufacturers are rumored to be taking the production of certain chips in-house. The named companies are particularly driving at manufacturing app processing chips internally. If they succeed, Qualcomm stands to lose as its customers turn into competitors and its market share shrinks.
Limited 4G LTE portfolio
Qualcomm’s portfolio of 4G LTE technologies is a little weaker than its 3G technology portfolio. That complicates the picture for its technology licensing business considering that the market is aggressively shifting to 4G networks.
Unfavorable technology adoption
Licensing of 3G technology generates more profits for Qualcomm than 4G technology. The company is betting that transition to 4G LTE from 3G will be gradual, but if adoption of 4G happens faster than expected, the company would see a negative impact on its bottom-line.
Falling commodity prices have triggered a global economic slowdown, which threatens to limit consumer purchase power. If consumers do not have enough money to spend on discretionary products such as smartphones, Qualcomm could find it difficult to meet its sales and profit targets.
Lower smartphone ASP
Competition in the mobile handset space is hurting average selling price (ASP) for smartphones as vendors try to outdo one another with competitive pricing. Lower ASP means reduced royalty rates for Qualcomm.
Snapdragon 820 could help restore peace and glory in Qualcomm, Inc. (NASDAQ:QCOM). But the company must also work hard to drive the adoption of the chip outside its traditional mobile market.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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