Qualcomm’s Downside if Chip Prices Continue to Fall

Qualcomm (NASDAQ:QCOM) chipsets pricing will likely decline around 10% in 2010 from around $18.10 in 2009 to $16.30 in 2010, based on our estimates. ^[1] This pricing decline is much faster than the average 4% decline that Qualcomm’s chipsets experienced in the last 4 years.

We believe that the factors leading to lower chipsets prices are: 1) rising competition from players like Broadcom (NASDAQ:BRCM), Texas Instruments (NYSE:TXN) and Infineon Wireless, which was acquired by Intel (NYSE:INTC), and 2) new chips designed for lower price points to tap emerging markets demand.

While our base case scenario envisions pricing declines to level off due to the growth of the smartphone segment that should offset the downward pricing pressures, we assess the downside risk here in the event that the current rate of pricing declines continue into the future. The current Trefis price estimate is around $50 for Qualcomm stock, which is close to the current market price.

[trefis_forecast ticker=”QCOM” driver=”0057″]

Will Chipset Pricing Continue Downtrend ?

Chipset prices declined at a faster rate in 2010 due to increasing competition and introduction of new chipsets designed for lower price points. However, there are some encouraging signs for Qualcomm going forward. Firstly, in the second half of fiscal year 2010, Qualcomm shipped 4x the number of Snapdragon chipsets compared to the first half of fiscal year ^[2]. Snapdragon is an application processor, which is an integral part of a smartphone and is used for giving the computing power for handling mobile phone software and applications. Snapdragon competes with Nvidia’s (NASDAQ:NVDA) Tegra processor and Texas Instrument’s (NYSE:TXN) OMAP 4 chipset in the mobile phone processor market.

An iSuppli report estimates that the Snapdragon chip used in the Nexus One phone costs around $30.50, which is almost double that of our estimate of Qualcomm’s average chipset pricing of $16.30 for 2010 ^[3]. Hence the fast Snapdragon growth should slow down the average chipsets pricing decline.

Snapdragon a Boost

Snapdragon’s growth will depend on two factors 1) the smartphone market growth and 2) its market share in smartphone market. The smartphone market grew at a healthy rate of 96% in the third quarter of 2010, compared to the 35% growth shown by the overall mobile phone market in Q3 2010 ^[4] . According to the same report, Android-based smartphones’ market share grew at a fast rate from only 3.5% in 3Q 2009 to 25.5% for 3Q 2010. Qualcomm’s Snapdragon chipsets are extensively used in Android smartphones and so Qualcomm should benefit from both smartphone market growth and Android’s growth in this market.

Downside Risk: 20% Downside if Chipset Prices Decline at Current Rate

The average chipsets pricing has been declining at a rate of around 10% for the past two years. We currently expect the decline to slow down to around 1% over the Trefis forecast period due to the reasons discussed above. However, in the scenario where the chipsets pricing continue to decline at 10% rate to reach around $8.60 by the end of Trefis forecast period, there could be a downside of around 20% to the $50 Trefis price estimate for Qualcomm stock.

You can see the complete $49.93 Trefis Price estimate for Qualcomm stock here.

1. Data estimated from the quarterly filings of first three quarters of 2010 [↩]
2. According to Qualcomm’s management in its fiscal year 2010 earnings conference call [↩]
3. iSuppli report giving tear down analysis of Google Nexus One [↩]
4. Gartner report on mobile phone market in Q3 2010 [↩]