Mediatek is rapidly gaining share in Asia for both smartphones and tablets creating a potential headwind for Qualcomm (NASDAQ:QCOM) which, while not strong enough to curtail Qualcomm's growth, will nonetheless slow it considerably. The competitive advantage Mediatek has is reasonable performance at quite low cost.
In smartphones, Mediatek's dual core MT6572 is the component of choice in low cost devices while its quad core MT6589 and MT8389 have won designs from Lenovo, TCL, Huawei, Oppo, Micromax and Yulong with most of these new devices likely to be in the market by the fall selling season.
The cost advantage is impressive.
A Samsung S4 has a bill of materials of about $236 per unit according to iSuppli. The S4 components include a Qualcomm Snapdragon 600 ($20), Qualcomm Atheros WCN3680 Wireless ($5.75) and Qualcomm analog PMIC'S for about $9.50 as well as IP licensing from Qualcomm of about $7.00 or total Qualcomm content approaching $43.00.
A competing Mediatek 4.7 inch smartphone with quad core processor has a bill of materials of about $90 including the Mediatek MT6589T chip for about $14.00 and Qualcomm content including IP licensing of less than $5.00 by my estimates. As an example of an existing Mediatek powered device's low costs, Trend Force estimates the Xiaomi "Red Rice" smartphone bill of materials adds up to about $85.00 allowing the device to be sold profitably for about $125 U.S. The Red Rice device has been an enormous success helping Xiaomi reach almost 19 million smartphone unit sales in China last year for a growth rate of 150%. Xiaomi is now offering a Red Rice smartphone in Singapore at a price equivalent to $134 U.S.
Based on the Samsung S4 content versus the Xiaomi Red Rice, Qualcomm earns about $37.00 less every time a consumer in Asia chooses a Mediatek powered Xiaomi smartphone instead of ones similar to the Samsung S4 powered and connected by Qualcomm components. While many like to think the devices are not comparable, the fact is they are not so different in their form and function and what differences exist are not likely to be sufficient to prompt users with limited means to buy the higher end models when a much lower priced device with a quad core processor and somewhat similar performance is available from Xiaomi and others.
Mediatek is also gaining yards in the very popular "phablet" space with a dozen design wins from Thi, OKAL, GFive, Lenovo, Huawei, Oppo, TCL, Micromax, and ZOPO to name a few all of which use Mediatek's MT6592 (Octacore) or MT6589 (Quadcore) chips. Once again the lure is reasonable performance at very low cost.
In parallel, Intel (NASDAQ:INTC) is making some progress gaining a handful of design wins for its Bay Trail and Clover Trail chips with the ATOM Z2580 Clover Trail processor in 4 models Ramos running Android OS and Windows 8 tablets from Breaconton and Yuandao with more likely to follow as the spring progresses. One rumor has "Intel Inside" the Nexus 8 but the recent sale of Google's mobile hardware unit to Lenovo makes that more of a coin toss and Qualcomm will no doubt compete for the socket. If Intel succeeds in its stated goal to have "Intel Inside" 40 million tablets in 2014, there will be 40 million fewer devices for Qualcomm to supply components.
Qualcomm is still the king of the hill in the mobile space and should show growth despite the competitive pressures but that growth will be muted by a combination of the shift to lower cost devices and the expanded presence of both Mediatek and Intel. Like all suppliers, Qualcomm will very likely be affected by slowing growth rates for both tablets and smartphones as these markets mature.
Qualcomm is a terrific company and is fairly valued at about 15 times 2014 earnings estimates as disclosed on Yahoo.com Finance, but the jury is still out as to whether it can turn in the expected bump from $3.91 earnings per share in fiscal 2013 to the expected $5.11 in fiscal 2014. My guess is that estimate will come under pressure as they year progresses and there is room for disappointment.
I have no current holding in QCOM but may take a short position if its price runs up through $80.00. I believe QCOM shares are value in the $60 range.
Disclosure: I am long INTC. 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.