Qualcomm (NASDAQ:QCOM) has been doing well since the start of the year - the stock was up about 9% in April - however, it started losing value, and currently QCOM is up about 5% year-to-date. During the last year, the stock recorded a gain of over 14%. Qualcomm has become a solid player in the technology sector, and the stock has been showing a smooth upward trend over the last five years. We believe the trend will continue, and the stock will again record almost identical gains to the last year. In our previous article, we discussed the opportunity related to the 5-mode chipset in the Chinese market and the risks associated with it. Recently, the Chinese government has eased its policy and will now allow Qualcomm to charge its normal royalty rates. In this article, we will discuss the position of royalty income of the company and the opportunity related to the 5-mode chipset. We will also discuss some other areas which we believe will derive future growth for the company.
As reported in the last quarter earnings, revenues from licensing business accounted for roughly 50% of the total revenue of Qualcomm. Unfortunately for the company, the royalties have been shrinking as the market gets saturated. However, Qualcomm might experience a considerable increase in its royalty revenues, as it capitalizes on the short-term opportunity present in China. China Mobile (NYSE:CHL) now intends to sell the handsets which offer 5-mode 4G terminal. Since Qualcomm is the only player which has a mature portfolio of chipsets, it has created favorable conditions for the company at least for some time. Now that the industry is shifting from TD-SCDMA to 4G-LTE, Qualcomm can continue to charge a higher royalty at least until the competitors step in the market.
In addition, the mobile industry in China is transitioning into 4G-LTE, which will have another favorable impact on the company. Many of the company's competitors have presence in both TD-SCDMA and LTE market. Qualcomm has a very strong presence in the 4G LTE market. This should drive some core growth for the company, while its competitors, even after stepping in the new market, would neutralize most of their growth by losing in the older market as the shift from the old technology to the new one will only result in replacement customers.
The Chinese smartphone market is huge. It increased 67% last year with 350 million smartphones sold as reported by IDC. It is expected to further grow roughly 40% this year with sales of around 450 million units. Qualcomm is in a unique position to benefit from this robustly growing market, and we will see its licensing revenues getting better in the coming quarters.
Source: SEC Filings
Qualcomm's revenue growth from QCT has come down considerably in the last twelve months, and it is now down to 8%, from 28% at the end of the first quarter last year. The above chart shows QCT revenue growth of the last twelve months. However, we believe that the following factors would also be favorable for the company.
Qualcomm has recently made an alliance with Micromax, India's second largest smartphone maker. In this collaboration, Micromax smartphones will use Qualcomm's next generation processor to make a "work and play" combination. Micromax, which sells millions of devices in a single month, can make a huge difference in Qualcomm's revenues. Right now, the project is in its early stages and should start taking affect by the end of the next quarter. Therefore, we are likely to see a significant increase in Qualcomm's revenues in the near future.
Samsung Galaxy S5 uses a number of chipsets of Qualcomm which include the Snapdragon 801 processor, Envelope tracking power Amplifier, RF transceiver, Power management and Audio Codec. This makes its royalty fee very heavy in this particular device. Qualcomm's royalty for each Galaxy S5 is around $41 as compared to its average royalty price of $22, based on the product's price. Samsung is the biggest smartphone maker in the world, and management is expecting to sell 10% more Galaxy S5 than it sold Galaxy S4. If Samsung meets its target, then it should result in a substantial increase in revenues for Qualcomm.
The revenue growth is visible for the company through new contracts, increased royalty fees and the Chinese opportunity. We believe the increased growth during the second half of the year will push the stock price up, and Qualcomm will end up having a gain of about 15% for the year, identical to the last year.
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