Qualcomm – QCOM
Qualcomm designs and manufactures semiconductors for mobile phones and develops and licenses wireless technology. The company’s key patents are centred around CDMA technology, which is a standard in wireless communications and the backbone of all 3G networks. The firm is also one of the world’s largest wireless chipmakers, supplying many leading handset makers with cutting-edge processors. Qualcomm is constantly renewing its range of products and one of its latest developments is the Mirasol graphic card with improved display functionalities for mobile applications.
Qualcomm’s CDMA internet protocol is approved by virtually all handset makers and the company is the sole provider to Apple of baseband technology which is used in iPhones and iPads. Furthermore, its Snapdragon processors are present in Samsung’s 4G products and other high-end Android products, as well as in all Windows phones.
CDMA technology is a major wireless communication standard that allows a device to send and receive content. Qualcomm is the innovator of the 3G protocol and as such it has a substantial advantage over its direct competitors. Today, in essence every single mobile application employs 3G enabled technologies and this usage generates substantial royalty revenues to Qualcomm. The royalty fee is based on the overall value of the handset and ranges between 2.5% to 5%.
The market for 3G is expected to expand gradually over the next decade and therefore licensing revenue for the company should be strong. The outlook beyond 2025 is slightly less obvious as the company does not have the same competitive edge in 4G technology. The principal provider in this market is the Korean company, LTE, who currently enjoys a time-to-market lead of about two years. However, QCOM has developed sufficient patents to allow its chipsets to capture and integrate 4G emitted traffic, on a backward-compatible basis. Furthermore, it is anticipated that even 5G technology will be backward-compatible with 3G technology, giving QCOM the opportunity to participate until at least 2025; and more importantly, time to develop and adjust its business strategy.
After an exceptional 31% revenue growth in the years 2011, 2012 and 2013, it should now be expected that revenue growth stabilizes in the low 10th, primarily because the ongoing shift from basic mobile applications to smartphones and tablets is providing some price pressure, and increased volumes can only partially compensate for lower margins. For the years ahead, the growth margins can be expected to stay in the region of 60%, and the operating margins in the region of 30%.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Qualcomm has a dominant position in 3G technology which largely secures, through royalty revenues, its business for the years ahead,
- The firm’s technology is employed in key mobile applications such as Apple iPhones, Samsung’s Galaxy S4, HTC’s One, and Nokia’s various Windows-based Lumia phones,
- In the fast moving technology market, the backward-comptability of 4G and eventually 5G technology provides the company some visibility up until 2025,
- Qualcomm will buy back around USD 5 billion of its own shares. Additionally, the company pays a dividend, presently offering a dividend yield of 2%, which is highly respectable for a technology company,
- Qualcomm continues to spend some of its excess cash on R&D and some high-risk, high-reward ventures.
Weaknesses:
- Volume growth cannot compensate for the price pressure; therefore, revenue growth is going to be eroded,
- 4G technology has been mastered by one of the company’s principal competitors (LTE) and therefore Qualcomm will, naturally, lose market share,
- Due to unfavorable economic conditions, 3G adaptation in EMA could be postponed by consumers,
- The company has limited potential to diversify outside its core business. For instance, it failed to enter into the mobile TV application market.
Company profile, investment opportunity and asset management integration:
| Metric | Rating |
| Operational risks: | Above average |
| Expected growth: | Above average |
| Long term value creation: | Excellent |
| Positive competitive advantage: | Well above average |
| Management excellence: | Average |
| Financial strength: | Above average |
| Investment orientation: | Group “Best-in-Class”: US-Technology, Telecommunication |
Price ranges:
| Buy: | Only forcustomers |
| Sell | Only forcustomers |
| Stop-loss: | Only forcustomers |
| Fair-value: | Only forcustomers |