Is Qualcomm a Cash King?

| About: Qualcomm Inc. (QCOM)

Qualcomm (NASDAQ:QCOM) makes money primarily by selling CDMA chipsets to mobile phone manufacturers, such as Apple (NASDAQ:AAPL), Nokia (NYSE:NOK), Samsung and Motorola (MOT), and by charging a royalty to mobile manufacturers on every phone sold

We estimate the Qualcomm’s cash balance constitutes around 27% of the $42 Trefis price estimate for Qualcomm’s stock. In comparison, the company’s chipset business constitutes 43% of our estimate while its mobile phone royalty business is about 29% of the Trefis price estimate.

Qualcomm is well positioned to benefit from on-going demand for more powerful mobile phones. Qualcomm provides the technology used in many of the mobile phones sold today and the royalties that it earns from the use of its technology helps drive growth of its cash balance. The company’s large cash reserves provide it the ability to continue investing in the technology that will be used in future mobile phones.

Two Ways Qualcomm Benefits from the Sale of CDMA Mobile Phones

Qualcomm makes money from every new CDMA-based mobile phone sold and its business depends on the number of CDMA mobile phones sold. Qualcomm has two primary revenue streams (i) selling CDMA chipsets to mobile phone makers (ii) collecting royalties on the CDMA technology used by mobile phone makers.

1. Qualcomm Sells CDMA Chipsets

Qualcomm sold around 338 million CDMA chipsets in 2009, which represents market share of 68% in the total CDMA phones market. We estimate that around 500 million CDMA phones were sold in 2009, representing about 40% of the 1.2 billion mobile phones sold globally in 2009.

2. Qualcomm Earns Royalties on CDMA Phones Sold

Mobile phone makers like Nokia and Motorola pay Qualcomm a royalty rate of about 3.6% of the selling price of each mobile phone sold with Qualcomm’s CDMA technology. This royalty rate has declined from over 4.3% in 2006 and we forecast that it will be 2.9% by the end of the Trefis forecast period.

Gross Margin on Royalties Drive Cash Reserves for Qualcomm

Qualcomm’s royalty earnings are practically pure profit. Gross margins on royalties are around 97% and royalties enable Qualcomm to keep increasing its cash balance over time.

A large cash balance makes Qualcomm’s stock less sensitive to short-term fluctuations in the company’s main businesses. You can modify our forecasts above to see how the Trefis price estimate for Qualcomm is impacted by some of the key factors for Qualcomm’s stock: CDMA market share, Royalty rate and Royalty gross margins.

Disclosure: No positions