Why We Believe Qualcomm’s Long-Term Growth Remains Intact

Having increased significantly last year, chipmaker Qualcomm’s (NYSE:QCOM) stock price has declined considerably so far this year. Though the company has witnessed strong growth (on a Non-GAAP basis) in the last few quarters, the various fines, litigation, patent issues, and antitrust charges slapped on Qualcomm undermines its licensing business, which has caused many analysts to downgrade the stock in recent months.

Despite the multiple lawsuits, we believe that Qualcomm’s diversification strategy will continue to drive the company’s growth going forward. The company has been entering new markets such as autonomous cars, servers, etc. to drive its future growth, and estimates its addressable market will expand to $138 billion by 2020. In October 2016, Qualcomm  announced the acquisition of NXP Semiconductors, which will significantly diversify the former’s product offering and provide it an entry into multiple markets outside its core mobile chipset business.

In this article we list several key factors that reiterate our view on Qualcomm’s long-term growth potential.

Our current price estimate of $69 for Qualcomm is more than 20% above the current market price.

See our complete analysis for Qualcomm

5G Leadership To Help Qualcomm Retain Its Edge In Mobile

5G is the next generation of mobile connectivity. The increasing demand for high data speed and large network coverage, significant growth in mobile traffic, growing machine-to-machine communication in organizations, and the need to support the increasing demand for broadband services over mobile networks, are the key factors driving the shift to 5G. The 5G technology is expected to get developed by 2020 and the total number of subscriptions for 5G technology is expected to reach 89 Million by 2022.  ^[1]

Qualcomm continues to work closely with global infrastructure vendors and operators on 5G NR trials to drive the mobile ecosystem toward validation and timely commercialization. The company has announced 5G NR trials with SKT and Ericsson in Korea, AT&T and Ericsson in the United States, ZTE and China Mobile in China, Telstra and Ericsson in Australia, and Vodafone and Ericsson in Europe. The company is confident that it is in a strong position to lead the 5G revolution.

NXP’s Acquisition Could Give Qualcomm An Edge In The Automotive Semiconductor Market

As more and more customers look for improved digital experience in the car, in addition to other parameters, car companies are banking on technological advancements in their interiors to compete with each other. This has led to an exponential increase in the semiconductor content per vehicle. According to research by Boston Consulting Group, the autonomous car market could be a $42 billion market by 2025, which could be around 12-13% of the total auto market. ^[2] Qualcomm has targeted the automotive infotainment market with its family of advanced processors, and its automotive solutions, including cellular, Wi-Fi, Bluetooth, and infotainment SoCs have been adopted by every major global automaker.

The acquisition of NXP Semiconductors, expected to close this calendar year, could help Qualcomm become the largest supplier of chips used in cars. NXP Semiconductors acquired Freescale Semiconductor for over $10 billion in 2015, as a result of which, it became the largest semiconductor supplier to the automotive industry. NXP specializes in designing high performance devices used in automotive, which accounts for 36% of the company’s revenue. The addition of NXP’s portfolio would significantly diversify Qualcomm’s offering and provide it an entry into multiple markets outside its core mobile chipset business.

Qualcomm Could Disrupt Intel’s PC and Datacenter Dominance

Qualcomm has been trying to gain a foothold in alternate growth markets such as PCs and data center. Currently both these markets are dominated by Intel, which commands a lions share of the market. Qualcomm recently collaborated with Microsoft to make Windows 10 compatible on mobile computing platforms, and its Snapdragon 835 for mobile PC designs is scheduled to launch in calendar Q4 2017.

The top companies that drive the data center market are encouraging the rise of alternate sources and we believe that Qualcomm is well-positioned to gain from that. With the growth in the number of data-centers, there is an increasing requirement to manage the energy consumption from these data centers. Qualcomm can utilize its experience in making power efficient mobile phone chipsets in designing power efficient server chipsets. The company is one among the few of the top-tier ARM licensees that hold both architectural and core licenses from ARM. Qualcomm announced the commercial sampling and the live demonstration of the world’s first 10nm server processors in late 2016. Google was rumored to endorse Qualcomm’s server-chip efforts.

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1. 5G Technology Market worth 89.0 Million Subscription by 2022, Markets and Market [↩]
2. The Autonomous Vehicle: The Car of the Future, Boston Consulting Group Report, April 2016 [↩]