Chipmaker Qualcomm (QCOM, Financial) has been a solid performer. The company's ability to respond to emerging trends in the mobile space has attracted a good number of customers. It has always anticipated slowdowns and weakness in the industry and positioned itself well in response. Now, Qualcomm is looking at the next frontier of growth.
Targeting the Low-End Market
As China is a big market with growth in the low-end mobile segment, Qualcomm has started focusing on making low end chipsets. The company has also cut down its expenses to maintain profitability. As a result of these robust moves, Qualcomm came out with fantastic results recently.
The fantastic results gave confidence to management to raise its profit guidance for the next year. As the Chinese government has awarded licenses to wireless providers to launch 4G LTE mobile network operations, Qualcomm is seeing profitable opportunities in China.
Qualcomm has two main growth drivers. The sale of smartphone chips is its primary business. The chipmaker also earns revenue via royalty fees from smartphone makers and providers that use its CDMA mobile technology.
Opportunity in China
With possibilities of declining growth elsewhere, Qualcomm's focus on China with its 4G initiative is important. On the other hand, a large percentage of China's mobile phone users still possess basic feature phones and are fast upgrading to smartphones, translating into a goldmine of opportunity for companies like Qualcomm.
Qualcomm is well-positioned in the LTE market as the company's chips are used in a majority of smartphones that use Qualcomm chips in their handsets. This provides a competitive hold to the company over competitors such as Intel, which is gaining momentum in this arena. With less than 1% share of the global smartphone chip market, Intel now also has to contend with the problem of idle production capacity.
Moving ahead, Qualcomm is well positioned to benefit from LTE upgrades. Qualcomm is having a strategic focus on the Chinese market. China’s two leading phone makers, Huawei and Lenovo, have delivered fantastic performances. Both have seen a whopping increase in smartphone sales by 57% and 47%, respectively. As the world’s third and fourth biggest smartphone manufacturers are seeing strong sales of phones, Qualcomm sees a great opportunity as it is working with these leading companies. Despite its huge potential, China may prove to be a tough nut to crack for Qualcomm that is already involved in a recent antitrust investigation by the region's government. The company is also likely to face stiff competition from local chipmakers such as MediaTek, whose low prices may be hard to match.
As a result of possible pressure, the only thing that can benefit Qualcomm in China is its dominance in the LTE arena. With a leading position, the company is expecting an increase in volumes and licensing revenue as network providers upgrade their LTE networks.
Conclusion
Many Chinese phone makers have global ambitions as well, as evidenced by Lenovo's recent decision to acquire the Motorola Mobility handset division from Google, which again translates into important opportunities for chipmakers like Qualcomm. And with Japan's NTT DoCoMo recently tying up with Apple to offer iPhones on its network, it seems Qualcomm can still reap some gains from developed markets. This is certainly the time to help yourself to a large portion of this stock, and then sit back and enjoy the benefits a couple of quarters later.
