There is no denying Qualcomm's (NASDAQ:QCOM) fabulous success over the last 30 years. Founded in 1985 by two MIT grads it has grown from a small satellite communication, location and messaging service for long-haul trucking to a global semiconductor giant designing and marketing telecommunication products. It commands a 66% share of the global cellular baseband market, over 95% of the LTE baseband market, has a stellar balance sheet with nearly $20B in cash, annual sales over $25B, and pays a $.42/Q dividend. Recently there have been a variety of issues reported that are pressuring or likely will start to pressure Qualcomm's cellular business over the next couple of years. That being said, Qualcomm's dominance isn't going to end tomorrow but tomorrow isn't what long-term investing is about. Long-term investors must be able to read the "tea leaves" and assimilate that information to try and understand what might happen next year or even 5 years from now and allocate their investing dollars wisely.
Below are four pressure points I see affecting Qualcomm negatively over the next couple of years.
1. Intel (NASDAQ:INTC)
Intel is behind in mobile but it is a relentless competitor and has a business model that allows it to virtually steamroll into any market it desires. Intel is able to lose over $4B/year developing its mobile division, pay a dividend of $.225/Q, and implement a $20B share repurchase program all while commanding gross margins in the mid 60s. Intel recently poached Qualcomm senior executive Amir Faintuch, president of Qualcomm Atheros, who oversaw Qualcomm's networking and connectivity business. Intel's XMM7260 Cat 6 modem recently won the LTE baseband slot in Samung's Galaxy Alpha. Intel is well-funded and relentlessly developing mobile solutions based on its 14nm bleeding edge technology. It has so little market share now compared to Qualcomm that it is virtually a certainty its market share will increase at Qualcomm's expense.
2. Apple (NASDAQ:AAPL) Developing Its Own Baseband Modem?
Reports are out that Apple has been assembling a team to design and develop baseband chips in 2015. Recently, two senior RF/baseband hardware engineers were hired away from semiconductor company Broadcom (BRCM) by Apple. Apple has proven, with its superb A6/A7/A8 processors, it can assemble top-notch chip designers to develop and design top of the line chips optimized for its operating software. Apple going "in-house" with its baseband chips would be a significant blow to Qualcomm as Apple's baseband business is estimated at $7B per year.
3. Qualcomm Bumped By Taiwan Semiconductor (NYSE:TSM)?
Qualcomm is rumored to be searching for additional foundry capacity because Taiwan Semiconductor is allocating significant resources toward Apple's A8 processor for the iPhone 6. Qualcomm is currently Taiwan Semiconductor's largest client but digitimes is reporting Apple may usurp them. Qualcomm is also reported to be going with Samsung's 14nm processor in 2015 because of Taiwan Semiconductor's problems handling both Apple and Qualcomm on its 20nm process.
4. China And EU Regulatory Actions
In November of 2013, the Chinese government initiated a probe into Qualcomm's monopolistic practices. As a result of this, Qualcomm faces possible large fines (1%-10% of China revenues) and a forced reduction in royalty rates in China. This is significant when you consider nearly of half of Qualcomm's revenues ($12B) are from China. In addition to Qualcomm's China regulatory woes, the EU is close to opening an antitrust investigation of Qualcomm. These investigations and the potential resultant fines and/or reduction in royalty rates could negatively affect Qualcomm's margins and ultimately reduce market share.
Qualcomm is facing increasing regulatory and competitive challenges. Investors should keep a close watch as the company navigates around these challenges. Margin compression, shrinking revenues and loss of market share are the largest concerns and should be readily identifiable in quarterly reports.
Disclosure: The author is long INTC.
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