After being extremely bullish on Qualcomm (QCOM) following the two-quarter-ago earnings "disappointment," I think it's time to take some profits off the table following the recent run-up in the company's shares following the most recent quarter's upside surprise. This is not a call on any fundamental weakness of the company (indeed, the management team is top-notch and the company's products are excellent), but it is a concern that the risk/reward profile no longer looks attractive on the long side.
Broadcom, Intel, and Nvidia Finally Enter the Smartphone Ring
Qualcomm, by virtue of its life-long focus on modems and RF, has benefited greatly from the broad shift toward LTE in the U.S. With no other vendor offering a credible apps processor plus modem/RF solution that could support the latest and greatest cellular connectivity standard, Qualcomm largely won the entirety of the mid- to high-end smartphone market. This lead has proven to be wonderful for Qualcomm, which has been able to post excellent growth numbers quarter after quarter.
However, it is my view that 2014 will not be so easy for the company. By Q4 2013, Intel (INTC) will be shipping its own multimode LTE plus apps processor platform for mid-range and high-end smartphones, which should allow it to eat into some of Qualcomm's market share in the quickly saturating high-end/high-margin apps processor market. Nvidia (NVDA), too, will finally justify its years of Tegra/Icera investments with its very own highly integrated part known as the Tegra 4i. Interestingly enough, CEO Jensen Huang noted several quarters ago that when Nvidia announced its Tegra 4i, it received significant interest from potential smartphone customers. Finally, we have Broadcom (BRCM), which recently announced its own LTE-Advanced modem that should begin shipping in the first half of 2014, with significant revenue materializing during the second half of 2014.
In all, the competitive dynamics in this industry are set to change dramatically. It is my view that Qualcomm could face significant market share and/or ASP erosion. Furthermore, with the high-end smartphone market suffering the same fate as the high-end PC market, Qualcomm carries the highest risk profile in this segment going forward.
The Tablet Situation Is Looking Better, but Even More Significant Risks Here
Qualcomm actually didn't really have much in the way of tablet design wins during 2012, despite the success of its Snapdragon S4 parts in smartphones that year. However, this year, it's different. Qualcomm has won the much-coveted Nexus 7 design, and publicly available interviews with management as well as leaks seem to indicate that more major designs are in the pipeline for its Snapdragon 600/800 parts in tablets (next-generation Kindle Fire?).
Unfortunately, Qualcomm benefited from the fact that it had no major competition for its parts in the tablet space, in a situation very similar to the one in the smartphone space. Nvidia's Tegra 4 was a bit late, and Intel's Bay Trail won't be launched until IDF, which seemingly left Qualcomm as the "winner by default." This once again raises concerns that while the balance of the year will continue to be strong, 2014 may be an entirely different ballgame. This is particularly true as Nvidia appears to be very quickly refreshing its Tegra line and Intel's Bay Trail could end up proving a very potent competitor, as it is built on the 22nm FinFET process -- which, thanks to the laws of physics, will likely lead to significant performance/watt and performance/mm^2 advantages over a product built on TSMC's 28nm HPM process. It gets worse, as Nvidia has already demonstrated its next-generation Logan SoC, which brings to bear the full grunt of its Kepler GPU architecture, and Intel has made its intentions to accelerate its 14nm tablet offerings clear.
The point is clear: Qualcomm is likely to face much more intense competition during 2014 than it did in 2013, and that is enough to be uneasy about owning shares at 12.72x EV/EBITDA. That's especially true when Nvidia can be had at 5.44x EV/EBITDA and Intel at 5.54x, and both have comparably little to lose and everything to gain in this space.
Conclusion -- Time to Take Some Profits
Now seems like a good time to take some profits. I would not recommend going short the name, as I do not see all that much downside from current levels. My concern is that the opportunity cost to owning shares may be too high relative to peers, and that the business itself will face much stronger headwinds than it did during 2012 or 2013, when it was the only game in town for a mid-range to high-end smartphone apps processor and modem. In this case, writing covered calls for a decent premium, or selling a portion of the position to lock in profits, is probably a better strategy than outright liquidating the entire position if you don't have anywhere better to put your money, as there could still be some upside from here. But it seems far more likely that shares are going to continue to trade sideways for the foreseeable future.