Seeking Alpha
Profile| Send Message| ()  

The stock of the struggling Japanese LCD display manufacturer Sharp Corp received a rare boost in the first week of December when it was announced Qualcomm (QCOM) will make an investment of $121 million in the company by purchasing 30.12 million shares. Sharp has been the world's second-worst performing major stock but the news raised its shares to a four-month high. According to the deal, Qualcomm will hold a 2.6% stake in Sharp with a provision for further $60 million investment by Qualcomm in the future.

The falling levels of demand and intense competition from its South Korean rival Samsung have created all sorts of problems for Sharp as it lost $1.25 billion in cash in the first half of the current fiscal year and reported a record $4.56 billion annual loss for its fiscal year ended March 2012. Moreover, it gave guidance of another $5.46 billion in losses for 2013 and failed to secure a $613 million investment from Taiwan-based assembler Foxconn. Further investment from Qualcomm is set on certain specific conditions for Sharp to fulfill such as R&D developments, $1.25 billion cash reserves and $1.21 billion in net assets as well as posting an operating profit for the six months ending March 31, next year.

Sharp will need to pull off a significant turnaround and Qualcomm's investment indicates that it believes that Sharp is capable of doing it. If Sharp does that, then Qualcomm could make the additional investment by the end of June, 2013, which will increase Qualcomm's stake to 5%.

Sharp's cost-cutting drive includes elimination of almost 3,000 jobs on which it will incur a one-off expenditure of $307 million in the current quarter.

According to Bloomberg, in the past 52 weeks, Qualcomm has spent $289 million for 21 acquisitions. In Sharp, Qualcomm would be interested in its Igzo (Indium-gallium-Zinc Oxide) technology that marries a crisper display image with lower power consumption in latest mobile devices such as the iPhone 5. Hooking up with Sharp implies that Qualcomm is looking to move beyond just being a chip supplier in this industry. At first glance getting access to Sharp's technology means optimizing its GPU development for this new display paradigm. Whether this means Qualcomm will get into designing and building its own phones is irrelevant.

Qualcomm is emerging as the industry leader for under-the-hood mobile technology. Now that 28nm chip supply is no longer seriously constrained, Qualcomm's Snapdragon S4's are fulfilling their promise to dominate this generation of smartphones and tablets with superior price to performance of nearly everything out there including Samsung's latest Cortex A15-based Exynos. Nvidia (NASDAQ:NVDA) will have its A15-based Tegra 4 out in Q1 2013. But the problem, ultimately, is that the A15 was designed more for the server than the mobile device market. This makes Qualcomm's and Apple's (NASDAQ:AAPL) decisions to build their own chips -- versus licensing ARM cores - look quite astute.

Looking at Qualcomm's chip roadmap we see a similar strategy to Lenovo's, attacking both the high and low end of the market at the same time, using variations on their own technology to aggregate the low-end of the market with S4's built on Cortex A7 CPUs married to 300 series Adreno GPUs to create value phones for emerging markets and China. Krait and the A15 chips will have no competition for at least the next two quarters until Intel refreshes Clover Trail and AMD attempts a come back to relevance with Kabini.

The mobile industry achieved a symbolic victory over the PC market earlier this year when Qualcomm's market cap exceeded that of Intel (INTC), the world's leading PC chip manufacturer.

Gartner has estimated a 98% increase in the demand for tablets to 119 million by the end of the current year. Qualcomm's inability to meet the growing demand of the Snapdragon S4 is gone and while it lost out to Nvidia on the Nexus 7 and the Surface RT tablets, that situation is over. Microsoft announced the next Surface will have a Snapdragon S4 Pro and the Nexus 4 is sporting the same dual-core S4 powering phones like the Nokia Lumia 920.

At this point, Qualcomm has the entire mobile market ripe for its taking and the company is executing perfectly. It has the right technology at the right time and is putting pressure on everyone from Intel to Apple. Its dominance has forced TI out of the market and its low-end chips will now pressure Broadcom's (BRCM) position at the low end of the market dominated by low-cost MediaTek SoCs, attacking again on features per dollar and creating a value proposition that few can touch. Qualcomm adding Sharp's display technology only improves its position to become an even stronger player overall.

Qualcomm

Intel

Broadcom

Stock YTD

+17.37%

-16.87%

+13.61%

P/E

18.31

8.79

26.12

EPS

3.51

2.29

1.28

Yield

1.60%

4.50%

1.20%

ROA

9.06%

13.87%

5.10%

ROE

17.46%

24.95%

10.61%

Source: Qualcomm's Sharp Investment In Display Tech