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Summary

  • Acquisitions and smart partnerships will be key for the future growth of the company.
  • Expected growth in the mobile traffic and the automotive sector will support the growth.
  • Manufacturing contracts will allow the company to have a cost advantage which should result in better pricing power in the emerging markets.

Qualcomm (NASDAQ:QCOM) has been growing well over the last few years and the dynamics of the sector indicate that the company will be able to continue its growth. Mobile traffic is expected to grow which should allow Qualcomm and its subsidiaries to benefit from the increased demand through its wireless technology. Further, Qualcomm finalized the acquisition of Wilocity, which will be a major step toward delivering multi-gigabit wireless solutions in the industry. Along with the acquisitions, emerging markets and the automotive semiconductor industry will be a major growth driver for the company.

Emerging Markets and Benefits from Acquisitions

The company is exploring emerging markets and looking to win contracts from local vendors. As discussed in our previous article, Qualcomm recently made an alliance with Micromax, India's second largest smartphone maker. We believe this alliance will be beneficial for the company and allow it to grow its revenues in the short-medium term. Currently, there are around 15 million broadband DSL connections and around 55 million DTH subscribers in India, which technically, could be converted and entertained through LTE technology. Moreover, China, the world's second largest economy, also is offering strong growth opportunities in the 4G-LTE connectivity devices. This will benefit Qualcomm in the long-run as the company has an early investment advantage in multi-mode LTE technology. Due to early access to LTE technology, Qualcomm has established a significant lead over other competitors in the market.

Further, Qualcomm is collaborating with Semiconductor Manufacturing International Corporation - SMIC (NYSE:SMI) to share its technological expertise on 28nm process technology and wafer manufacturing services in China, in order to produce its well-known Snapdragon processors. SMIC is one of the largest and most advanced semiconductor foundries in China and will help Qualcomm to offer production on both 28nm PolySiON (PS) and high-K dielectrics metal gate (HKMG). This will bring substantial benefits to Qualcomm which will enable it to lead the market with better next generation wireless technologies. The production collaboration with SMIC also enables Qualcomm to reduce manufacturing and other associated costs - thus giving it an advantage to effectively negotiate in growing emerging markets.

Future Growth Opportunities

Today, the latest automobiles are equipped with numerous semiconductor chips which control everything from automatic braking to detecting traffic blind spots. According to automotive research conducted by IHS, the automotive chips market is projected to grow to $27.9 billion, up around 6.1% this year. Being the market leader in the smartphone chip industry, Qualcomm is now preparing itself to get into the massive automobile industry. Qualcomm reported that it is well prepared to enter the automobile semiconductor market and developed a huge inventory for wireless modem orders from automakers.

The automobile industry is getting smarter these days with providing internet hotspot connection options in their products. General Motors (NYSE:GM) is turning its new vehicle range into Wi-Fi hotspots connected via 4G internet connectivity which will allow its passengers to connect their smart mobile devices to high-speed internet. The 2015 product range of GM, including Chevrolet Corvette, Impala, Malibu and Volt, will be the first vehicles to come optionally available with 4G-LTE connectivity. Moreover Qualcomm management anticipates that by 2017, almost 60% of cars will have cellular connections, up about 10% from today. This will create huge future growth potential for Qualcomm as it dominates the wireless chip industry.

As the technological warfare is getting more intense, the companies are considering newer and more advanced vendors to equip their devices. Due to rising demand in China, Qualcomm is moving toward smaller and efficient manufacturing techniques, including 14 and 28 nanometer architecture, which enables the company to change its previous vendors. The company will likely purchase a larger proportion of its 14 nm smartphone chips from Samsung Electronics rather than its usual vendor, Taiwan Semiconductor Manufacturing (TSMC) by the second half of 2015. Moreover, there is a growing possibility that Qualcomm will sign a contract with Samsung, which will substantially benefit both companies in the long run.

Conclusion

We maintain that Qualcomm is well positioned to grow and the company's lead in the sector is expected to extend further. Qualcomm is making smart alliances and partnerships on both manufacturing and vendor front, which should provide the company an advantage on the cost as well as pricing. Qualcomm is a solid long-term pick and the stock price should show a steady upward trend as the fruits of these partnerships start to come in.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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

Source: Qualcomm Well Positioned To Grow