Qualcomm Eyes Emerging Markets With New Entry-Level Quad-Core Chipsets

| About: Qualcomm Inc. (QCOM)
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Qualcomm (NASDAQ:QCOM) recently broadened its portfolio of Snapdragons to include two new families of entry-level chipsets that will help it target the demand for low-end smartphones in emerging markets. Following closely in the footsteps of the 600 and 800 family of high-end Snapdragons launched last month, Qualcomm's newly unveiled 200 and 400 series are primarily aimed at the burgeoning demand for budget smartphones. Some of these chipsets such as MSM8226 and MSM8626 not only offer quad-core processing and better graphics abilities but are also built on a 28nm manufacturing process that will help increase battery life. Even the low-end Snapdragon 200 chipsets such as MSM8225Q and MSM8625Q bring quad-core functionalities to entry-level smartphones, which should help Qualcomm stave off growing competition from Broadcom (BRCM) and MediaTek in the emerging markets.

Furthermore, Qualcomm is positioning itself for China Mobile's (NYSE:CHL) nascent but potentially huge 3G market. Some of the newly launched Snapdragons have been built with baseband support for all of China's 3G networks, including China Mobile's proprietary TD-SCDMA one, on a single chip. With emerging markets expected to see the highest growth rates in smartphone adoption in the coming years, Qualcomm is looking to extend its dominance on the high end to the entry-level smartphone market as well. Our $71 price estimate for Qualcomm stock is about 10% ahead of the market price.

Growing Smartphone Demand in EMs

The emerging markets' demand for smartphones is on the rise. China, for example, has already overtaken the U.S. as the biggest market for smartphones in 2012. Other emerging markets such as India and Brazil are also seeing strong growth and both are expected to break into the top five markets by 2016, according to IDC's latest report. As a result, the mobile app processor market is also seeing high growth rates. A recent report by Strategy Analytics found that the global market for smartphone application processors grew by a strong 58% in Q3 2012 over the same period last year.

However, while Qualcomm continues to be a dominant player in the high-growth mobile chipset market, its market share is taking a hit due to growing competition from Broadcom and MediaTek, both of which have benefited from the popularity of low-end Android handsets in emerging markets. Qualcomm's revenue share of the global mobile application processor market declined year over year from 49% to 42% in Q3 2012. The loss in market share was especially severe in the Android ecosystem where Qualcomm's share declined from over 60% in early 2011 to about 35% in Q3 2012. With the introduction of the 200 and 400 series of Snapdragons, Qualcomm will seek to regain some of that lost market share.

The entry-level quad-core chipsets will help Qualcomm address the growing demand for low-end phones that can offer higher levels of performance. However, with MediaTek having also entered the fray with quad-core chipsets of its own, it won't be easy. Competition in the low-end market is getting fiercer by the day, but having a quad-core solution will help Qualcomm defend its market share better without having to cut prices.

China Mobile's Untapped Potential

At the same time, Qualcomm will be looking to take advantage of China Mobile's huge subscriber base and minuscule 3G penetration. China Mobile has the world's largest subscriber base of close to 700 million, which is about 65% of the Chinese wireless market. However, its 3G growth has been hampered by a largely incompatible home-grown TD-SCDMA network, which requires manufacturers to come up with specially crafted handsets for the carrier. Some of Qualcomm's new quad-core chipsets will eliminate this handicap by helping manufacturers build smartphones that support not only other commonly available 3G technologies, but also TD-SCDMA. Further, with China Mobile looking to mitigate its 3G shortcomings with a 4G high-speed TD-LTE network, Qualcomm's LTE expertise could come in very handy. One of Qualcomm's recent announcements include a dual-core MSM8930 chipset that has support for both TD-SCDMA and TD-LTE.

Addressing China Mobile's 3G issues will help Qualcomm tap into a huge untapped market of future smartphone buyers. Due to 3G incompatibility issues, China Mobile has been able to convert only about 13% of its total base to 3G. This compares poorly to about 30% that competing carriers China Unicom and China Telecom have managed to convert. With a huge market of over 600 million 2G subscribers on China Mobile's network, Qualcomm's new quad-core chipsets could help it ride the huge Chinese demand for 3G smartphones in the coming years.

Disclosure: No positions.