Qualcomm (QCOM) is set to announce its Q2 FY 2012 earnings on July 18th. The company has had a record run over the past few quarters with revenues growing year over year by almost 30% each quarter. However, the company issued caution during the April earnings call that supply chain constraints at its lone 28nm contract supplier, TSMC, could limit "potential revenue upside this fiscal year." While supply issues may have an impact on chipset sales this quarter, we see this as only a short-term cause for concern since Qualcomm also said that it plans on meeting demand by the start of next year -- a commitment we believe it will be able to keep with the recent addition of UMC and Samsung to its 28nm supply chain.
Having multiple vendors will not only help Qualcomm diversify the risk of one vendor missing targets, but also prepares its supply chain for the burgeoning future demand for mobile chipsets. We have a $68.40 price estimate for Qualcomm, which is more than 20% ahead of the current market price.
Sustained high demand for mobile devices
Smartphones have shown significant growth in 2011, and we expect this to continue in 2012 as well. Despite economic uncertainties, consumer shift toward smartphones continues to be strong. iPhone and Android smartphones have registered incredibly high growth and tablet growth is picking up momentum as well. Gartner estimates that tablets grew by over 250% in 2011, and will continue to grow rapidly for the next few years to reach about 370 million unit sales by 2016.
We also expect Qualcomm to benefit from its longstanding association with Microsoft as the latter makes a reinvigorated two-pronged assault on the mobile landscape with the launch of Windows 8 and Windows Phone 8 this year. The growing adoption of mobile devices will help Qualcomm see its mobile chipsets, bolstered by its Atheros' acquisition last year, gain increased traction.
Emerging markets such as China are seeing an explosion in demand for 3G capable smartphones. With a billion strong mobile subscriber base, China is poised to become the world's largest smartphone market by the end of the year.
28nm demand to remain high
As for the 28nm chipsets, we see the demand continue to remain high especially since there is a lack of such designs currently in the market that not only deliver excellent processing speeds, but also conserve space and power as well. This is not only because of the 28nm manufacturing process, but also the availability of an integrated radio on the chipset. Moreover, the integrated radio supports LTE, which carriers in developed markets such as the U.S. are promoting widely. Two popular smartphones, HTC One X and Samsung Galaxy S III, which were launched in international markets with processors from rivals used Qualcomm’s Snapdragon S4 for the U.S. launch, primarily for the integrated LTE support.
As Qualcomm adds more suppliers, the 28nm production process matures and the supply issues are overcome, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated. However, nearer term, this quarter will give us an idea of the impact that not meeting 28nm demand can have on revenues.
Qualcomm will also continue to benefit from the diversified set of customers that it has managed to woo, banking on its broad portfolio of Snapdragon chips that includes both integrated as well as standalone processors. A significant design win last year was when it added Apple (AAPL) to its broad customer base last year, replacing Infineon (now acquired by Intel) and becoming the exclusive baseband provider for both the iPhone and the iPad. Apple has already launched the new iPad in March and will launch the next-gen iPhone 5 later this year. We expect the iPhone 5 to sport a 28nm Qualcomm chipset that supports both voice and data over LTE..
However, Nvidia (NVDA) is clawing at its heels with the Tegra line of chipsets that have made their way into some of the high-end multicore smartphones this year. Further, it is working on getting them compatible/integrated with its Icera LTE radios, so Qualcomm will be wary of losing its LTE advantage. Nvidia has also trained its sights on the low-end tablet market with its Kai reference design that Google (GOOG) has used in its $199 Nexus 7 tablet. With rivals Intel (INTC) and Broadcom (BRCM) also making a bid on the growing mobile market, Qualcomm will need to be on its toes to ward off rising competition.
Disclosure: No positions.