Qualcomm Wants To Be More Than Just A Semiconductor Company - Will It Succeed?

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 |  About: Qualcomm Inc. (QCOM), Includes: AVGO, NVDA
by: Amal Singh

Qualcomm (NASDAQ:QCOM) surprised everyone when it declared its intent to enter the wearable gadgets market. It plans to launch the first iteration of its smart watch called Toq in the fourth quarter. This would be designed to serve as a second display to your smartphone. This could be a "smart" move if we look at the woes of Intel due to a shrinking PC market.

Investors were concerned that Qualcomm is currently too deeply entrenched in the mobile computing space, just like Intel was tied up with chips & processors for the PC market and was too late to diversify. Perhaps, Qualcomm may have many such "smart surprises" in store for the future that would please investors. But, before looking ahead, let's take a look at its current business which is doing well.

Looking at the past

Qualcomm has a strong presence in the mobile computing space and was an early mover in the 4G LTE connectivity field. The company's recent quarterly performance has shown that it has improved considerably. It reported $6.24 billion and $2.04 billion in revenues and operating income, respectively, for the third quarter. The company reported that its revenue moved north by 35% and its operating income soared 18% year over year.

Excluding special items, adjusted EPS for the quarter was $0.92, a penny better than the consensus estimate. The company shipped 172 million MSM (Mobile Station Modem) chips, which was a healthy 22% growth as compared to the same quarter last year.

Looking ahead

Qualcomm's Snapdragon 800 quad core chipset supports 3G/4G LTE modem with ultra HD graphics. It also offers a better battery life and faster clock speeds of up to 2.2 GHz. This makes it an obvious choice for high-end smartphones. The company will supply Snapdragon 800 processors to Samsung for Galaxy S4 LTE-A phones also.

The company is strongly integrated into Apple's iPhone and iPad products as well as many Android-based devices, including the best-selling products from Samsung (OTC:SSNLF), Sony (NYSE:SNE), HTC to name a few. It also has displaced Nvidia's (NASDAQ:NVDA) Tegra line of chips in the second iteration of the Nexus 7 tablet from Google. It is evident that the Qualcomm is positioned for growth even under different competitive and market scenarios.

Qualcomm's Snapdragon 800 quad core processors should also gain traction in emerging markets as deployment of 4G LTE gains momentum in China and India. In India, Qualcomm is looking to gain through its partnership with Bharti Airtel, the largest telecom operator in India. India has a huge telecom market with only 2% penetration of broadband service.

China is definitely the largest market for smartphones and all major players in the smart devices industry are making moves to gain a foothold in the Chinese market. By the end of 2013, China Mobile (NYSE:CHL), the world's largest telecom operator, has plans to deploy around 20,000 TD-LTE base stations. It has already selected Snapdragon and Gobi-based LTE-TD smart phones, since they are highly compatible with its network. This obviously will create a huge growth opportunity for Qualcomm going forward.

According to Gartner, the penetration of smartphones in emerging markets is still only 10% of the total population, and global smartphone demand is expected to grow at an annual compounded rate of 20% from 2012 to 2017. As for tablets, Gartner is expecting a huge annual increase of 67.9% in 2013 as tablets continue to gain market share at the expense of the declining PC market.

2014 is already being touted as breakthrough year for smartwatches and as already mentioned above; Qualcomm has declared that it will be launching its own smart watch called Toq in the fourth quarter of 2013. The latest research from Canalys projects that smartwatches "are set to explode by the end of 2014″ when vendors will ship more than 5 million units, a 900% increase from the number of units Canalys expects vendors to ship this year.

Looking around

In the wireless segment, Broadcom (BRCM) competes with Qualcomm. Almost 50% of Broadcom's revenue comes from this segment. But Broadcom has already lost a good number of low-cost smartphone sockets to Qualcomm. Instead of Broadcom's products, Qualcomm's connectivity chips were chosen for the Motorola Moto X and the Samsung Galaxy S IV Mini. In addition, Broadcom's main cash cow, 3G solutions, will be replaced in the next few years by 4G LTE solutions where Qualcomm already has a lead.

Even after disappointing earnings, most analysts still remain bullish on Broadcom, primarily because the stock is undervalued. However, one needs to ponder that in case the stock is really undervalued, why has negative sentiment persisted for so long?

Broadcom's negative market sentiment could increase further if Apple decides to use Qualcomm's connectivity chips for both the iPhone 5S and the 5C model that is aimed at emerging markets. Qualcomm's new RF360 Front End Solution chip could allow the iPhone to run on all 2G, 3G and 4G LTE networks and thereby allow Apple to save on costs which would become critical for the mid-range/low-end market segment.

Nvidia does offer some competition to Qualcomm in the mobile computing space through its Tegra processors, with the latest iteration being the Tegra 4. Nvidia has landed a spot at Chinese smartphone manufacturer Xiaomi, which has made its presence felt in China through sales of its iPhone beating handset.

Xiaomi was also in the news recently for having appointed Hugo Barra, of Google to lead the company's international business development as it prepares to take on Apple and Samsung overseas. Xiaomi win could be an important win for Nvidia in the long run.

Nvidia's Tegra 4 platform will also power Microsoft's Surface 2 tablets. This again is an important win technically, although the Surface tablets are yet to make any important dent in the tablet market. Windows RT, as we already know, was a failure. In the tablet space, there are rumors that Nvidia is coming up with its own Tegra 4 powered tablet later this year.

What's in it for investors?

When it comes to mobile, Qualcomm is way ahead of peers. The company commands a lion's share of the global baseband market and it is looking to extend its expertise further by branching into the next hot category--smartwatches. So investors looking for an ultimate play in mobile should consider Qualcomm for their portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.