Qualcomm Dials Up $69 On Smartphone Demand In Emerging Markets

The global smartphone market is blossoming and carrying everyone associated with it up as well. In a recent report by Strategy Analytics, the firm found that the smartphone application processor market grew by a strong 55% in Q1 2012 over the same period last year. ^[1] Market leader Qualcomm (NASDAQ:QCOM) continued its dominance but saw its revenue share decline y-o-y from 51% to 44%. A big reason for the decline was increased competition from Broadcom (NASDAQ:BRCM) and MediaTek, both of which benefited from the growing popularity of low-end Android handsets in emerging markets.

See our complete analysis for Qualcomm stock here

The growing threat from both Broadcom and MediaTek is primarily due to their baseband-integrated app processors which are cheaper for handset makers to use in mobile phones than standalone processors. Low-end smartphones are growing at a fast rate in emerging markets such as China which, due to its low smartphone penetration, is a sort of blank slate for most mobile semiconductor manufacturers. China, for example, has a 3G penetration of about 17% but smartphone sales are growing rapidly. This gives most chipset players an even ground to grow their market share.

Qualcomm, therefore, is trying to penetrate emerging markets by lowering its chipset prices, hoping that the huge volumes it stands to gain will more than offset the drop in ASPs. (see Qualcomm Lowers Price on Chips to Penetrate China, Emerging Markets)

The company has also been a big proponent of the integrated-baseband strategy, which has generally been a good call, but the growing standalone processor market has eaten into its market share in recent times. Stand-alone processors accounted for 44% of total smartphone app processors shipped in Q1 2012, up from 39% last year. This may however be a near-term phenomena as multi-core processors and LTE-capable phones become mainstream and the technology advances enough to allow for integrated chipsets with quad-core and LTE support.

Growing competition and an increasing penetration of smartphones in emerging markets may eat away into Qualcomm’s app processor market share further but the company still stands to make money off its 3G patents. Qualcomm charges most chipset manufacturers as well as handset makers a percentage of their ASPs as royalty for using its 3G technology. The company’s industry-leading CDMA patent portfolio will therefore help it rake in huge high-margin licencing revenues in the coming years as the transition from 2G to 3G in emerging markets continues at full swing.

Our $69 price estimate for Qualcomm stock is about 12% ahead of the market price.

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1. Strategy Analytics: Smartphone Applications Processor Revenue Soared 55 Percent in Q1 2012, MarketWatch, August 7th, 2012 [↩]