Qualcomm Rides Smartphone Wave To $69 With Strong Growth

Qualcomm (NASDAQ:QCOM) announced a strong set of Q3 FY 2012 results on Wednesday. Revenue for the quarter increased 28% y-o-y and net profits also soared 17% on continued strong demand for 3G/4G products worldwide that drove both chipset sales as well as licensing revenues. However, September chipset sales forecast were slightly muted as the company expects the demand profile for the year to be more “back-end loaded as new devices are launched for the holiday season”. ^[1]

This may not have much of an impact on the full calender year results for Qualcomm as the ramping up of 28nm supply, together with the holiday demand for new device launches such as the iPhone, would result in a very strong December quarter. The company reiterated its guidance of being able to match the demand for 28nm chipsets with supply by the end of the year – a commitment we believe it will be able to keep with the recent addition of UMC, Samsung and one other supplier to its 28nm supply chain.

The fact that Qualcomm has registered a 28% uptick in sales despite not meeting demand underscores the fundamentals of the market it is operating in. Also, having multiple vendors will not only help Qualcomm diversify the risk of one vendor missing targets but also prepares its supply chain for the burgeoning future demand for mobile chipsets. We have a slightly revised $69 price estimate for Qualcomm, which is more than 15% ahead of the current market price.

See our complete analysis for Qualcomm stock here

Sustained high demand for mobile devices

Smartphones have shown significant growth in 2011, and we expect this to continue in 2012 as well. Despite economic uncertainties, consumer shift towards smartphones continues to be strong. iPhone and Android based smartphones have registered incredibly high growth and tablet growth is picking up momentum as well. Gartner estimates that tablets grew by over 250% in 2011, and will continue to grow rapidly for the next few years to reach about 370 million unit sales by 2016. ^[2]

Emerging markets such as China are seeing an explosion in demand for 3G capable smartphones. Smartphone shipments in China registered a 160% growth y-o-y in Q1 2012, accounting for almost a quarter of all smartphones shipped globally. With a billion strong mobile subscriber base and carriers increasingly trying to transition their huge 2G base, China is poised to become the world’s largest smartphone market by the end of the year. (see Qualcomm Rides China’s Smartphone Boom As It Reaches One Billion 3G Subscribers)

An increasing mix of smartphones will not only increase demand for 3G/4G chipsets but also improve device ASPs and bolster licensing revenues, which are calculated as a % of the ASP. Qualcomm has revised its ASP guidance for FY2012 upward from the prior $212 midpoint estimate to $219.

We also expect Qualcomm to benefit from its longstanding association with Microsoft as the latter makes a reinvigorated two-pronged assault on the mobile landscape with the launch of Windows 8 and Windows Phone 8 this year. (Qualcomm Readies Itself For Microsoft’s Mobile Foray) The growing adoption of mobile devices will help Qualcomm see its mobile chipsets, bolstered by its Atheros’ acquisition last year, gain increased traction.

28nm demand to remain high

As for the 28nm chipsets, we see the demand continue to remain high especially since there is a lack of such designs currently in the market that not only deliver excellent processing speeds but also conserve space and power as well. This is not only because of the 28nm manufacturing process but also the availability of an integrated radio on the chipset. Moreover, the integrated radio supports LTE which carriers in developed markets such as the U.S. are promoting widely. (see Qualcomm Leads the LTE Charge In 2012) Two popular smartphones, HTC One X and Samsung Galaxy S III, which were launched in international markets with processors from rivals used Qualcomm’s Snapdragon S4 for the U.S. launch, primarily for the integrated LTE support.

As Qualcomm adds more suppliers, the 28nm production process matures and the supply issues are overcome, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated. Since 28nm chipsets are also costlier as compared to the other chipsets built on a different manufacturing process, it will also help chipset ASPs rise in the coming quarters.

Qualcomm will also continue to benefit from the diversified set of customers that it has managed to woo, banking on its broad portfolio of Snapdragon chips that includes both integrated as well as standalone processors. A significant design win last year was when it added Apple to its broad customer base last year, replacing Infineon (now acquired by Intel) and becoming the exclusive baseband provider for both the iPhone and the iPad. (see Qualcomm Gets Big Win Over Infineon with iPhone 4S) Apple has already launched the new iPad in March and will launch the next-gen iPhone 5 later this year. We expect the iPhone 5 to sport a 28nm Qualcomm chipset that supports both voice and data over LTE..

However, Nvidia is clawing at its heels with the Tegra line of chipsets that have made their way into some of the high-end multi-core smartphones this year. Further, it is working on getting them compatible/integrated with its Icera LTE radios, so Qualcomm will be wary of losing its LTE advantage. (see Nvidia’s LTE Chips Validated By AT&T, Challenges Qualcomm’s LTE Dominance) Nvidia has also trained its sights on the low-end tablet market with its Kai reference design that Google has used in its $199 Nexus 7 tablet. (see Nvidia Targets The Tablet Market; Qualcomm’s Reponse To Come Later This Year) With rivals Intel and Broadcom also making a bid on the growing mobile market, Qualcomm will need to be on its toes to ward off rising competition.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. QUALCOMM Incorporated Management Discusses Q3 2012 Results – Earnings Call Transcript, Seekingalpha, July 18th, 2012 [↩]
2. Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, Gartner Press Release, April 10th, 2012 [↩]