Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message| ()  

Over the past week, Qualcomm (QCOM) seems to have benefited from rumors that it has won the app processor slot in Google’s (GOOG) next version of Nexus 7 tablet from Nvidia (NVDA). The Nexus 7 was one of the two high-profile tablet launches to have featured Nvidia’s Tegra 3 chipset last year; the other was Microsoft’s (MSFT) Surface RT. Both of these wins were significant, and established Nvidia as a serious contender in the nascent tablet space. While Nvidia’s superior graphics abilities served it well in winning tablet share, Qualcomm’s baseband advantage helped it defend its smartphone fortress pretty well. But now it seems Qualcomm’s superiority in 3G/4G connectivity solutions might have tipped the scales in its favor in the tablet market as well.

This speculation was triggered by an analyst report released by Pacific Crest last week, which claimed that Qualcomm’s standalone APQ8064 chipset might feature in the next-generation Nexus 7 instead of Nvidia’s newly launched Tegra 4. While pricing factors were touted to be one of the reasons, the report also said that Google might be looking to source both the app processor and the baseband from the same supplier in the interest of broader compatibility with LTE, and to avoid logistical issues. While we cannot comment on the veracity of this report, we do find a few concerns with the reasoning given.

Doubts Remain About Such A Win

If Google is looking for a single source, it can stick with Nvidia, since the Tegra 4 is compatible with 4G LTE when coupled with one of its own Icera basebands. This may have been a concern last year when Nvidia hadn’t made its Icera basebands LTE-compatible, but that issue no longer exists. That said, Qualcomm would still make for an attractive choice if Google is looking for an app processor that has an LTE-compatible baseband integrated on the same chip. But the report claims that Google has its eyes on the standalone APQ8064 chipset and not the LTE-integrated MSM8960.

Moreover, the APQ8064 is of an earlier generation compared to the newly launched 600 and 800 Snapdragon series, which means Google will be choosing an older Snapdragon over the latest Tegra if the report is true. However, the Nexus 7 is a low-end tablet, and Google might be looking to save on costs considering that it sells the tablet at around break-even. Still, it seems a little suspect that Google will ship its flagship tablet with an older processor.

What, on the other hand, might clinch the issue in Qualcomm’s favor is that its LTE basebands are in their third generation already compared to Nvidia’s Icera chipsets, which became LTE-compatible just last year. The previous generation Nexus 7 only had HSPA+ connectivity, and Google will therefore, be looking to launch the next-generation tablets with LTE support. In such a scenario, Qualcomm’s LTE superiority could stand out.

Nexus 7 Win Could Bolster Qualcomm’s Case In Tablets

Either way, we believe that Qualcomm wouldn’t stand to gain much from a Nexus 7 deal alone. The current tablet market is dominated by the iPad, leaving precious little for anyone else. According to last quarter’s IDC results, close to 3 million Nexus 7 tablets were shipped during the holiday quarter, assuming it comprises a majority of Asus’ tablet shipments. Considering that the tablet market is seeing solid growth, we can extrapolate that figure to indicate about 10 million units in 2013 sales for the next-generation Nexus 7 tablet after it is launched in Q2 2013. If we apply Qualcomm’s average chipset selling price of ~$20 to this estimate, we arrive at about $200 million in additional sales – an inconsequential amount compared to close to $24 billion in revenues that we estimate Qualcomm will generate in 2013.

The long-term impact of such a win could, however, be more significant. With iPads so far ruling the tablet roost, Qualcomm has concentrated its resources on improving the performance of smartphone chipsets. But, considering the nascent stage the tablet market is in currently, Qualcomm could benefit hugely from an explosive tablet market growth in the coming years as a number of Windows and Android-based tablets make their way out. A Nexus 7 win could help propel Qualcomm forward to more such tablet wins in the future. The fact that Qualcomm is gradually increasing focus on tablets can also be seen in the company’s recent foray into high-performance quad-core chipsets built on the Krait design. (see Qualcomm Fixes Its Gaze On Tablets With New Quad-Core S4 Pro)

See our complete analysis for Qualcomm | Nvidia here

Disclosure: No positions.

Source: Qualcomm's Rumored Nexus 7 Win May Be Just That - A Rumor