Qualcomm (QCOM) recently announced earnings and highlighted the growth opportunity in emerging markets as telecom operators adopt 3G technology. Qualcomm competes with other mobile chipset makers like Texas Instruments (TXN), Infineon and Broadcom (BRCM) in the mobile segment.
3G mobile phone technology is based in large part on CDMA2000 and WCDMA protocols and is considered better than the traditional GSM technology. This 3G technology provides faster internet access, download speeds and increased network capacity and flexibility. As telecom operators in emerging markets like China and India continue to upgrade their networks from 2G to 3G technology, we believe this is a large growth opportunity for Qualcomm.
If current CDMA penetration rises from an estimate 50% currently to 85% of all mobile phones by 2016 versus 77% as we predict, this chips in about 7% upside to our price estimate of $49.93 price estimate.
3G Technology in Emerging Markets
Qualcomm added 14 new Chinese licensees in fiscal year 2010, bringing the total number of Chinese licensees to 65. In India, the majority of newly licensed operators plan to launch 3G services before the 2010 year end. Tata DOCOMO became the first private Indian operator to launch 3G.
3G Technology Adoption Benefits Qualcomm in Two Ways
- Qualcomm is the market leader in CDMA mobile phone chipset market with an expected share of around 66% in 2010. 3G technology adoption increases the addressable market for which it sells chipsets. These chipsets are sold to mobile phone vendors like Nokia, Samsung and LG.
- Qualcomm will earn higher CDMA royalty revenues, since it is expected to collect an average of around 3.2% royalties in 2010 from every CDMA mobile phone sold.
Since 3G is based primarily on CDMA technology, higher 3G sales will increase the number of CDMA mobile phones sold (the “CDMA penetration”), which will benefit Qualcomm.
As per the company’s guidance for calendar year 2011, we have revised the CDMA phone penetration to around 56% by 2011 from the previous expectation of 53%. This rises to around 77% by the end of Trefis forecast period from the previous expectation of 68%. This implies that we expect 1.4 billion CDMA mobile phones to be sold annually by 2016.
However, there could be an upside of 5% to the $49.93 Trefis price estimate for Qualcomm’s stock if CDMA penetration increases at an even faster rate to reach 83% by the end of Trefis forecast period, instead of 77% that we forecast.
Disclosure: No position