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Microsoft’s Focus on the Surface Can Benefit Qualcomm

May 19, 2014 | About:



Over the years, Microsoft (MSFT) has been diversifying it product portfolio from software solutions to gadgets. The world's largest software maker is working to improve sales of its tablets, although it has failed to dent Apple, which is dominating the tablet market. The company also announced that it plans to unveil a new series of small tablets.

Microsoft reported that its fiscal third-quarter sales from devices and consumer hardware, including Xbox and Surface devices, rose to $1.97 billion, compared to an average analyst prediction of $1.95 billion. Yet, Microsoft's market share in tablets remains small. As per IDC, Microsoft's Windows had 3.4% of the tablet software market in 2013. For the Surface tablet, the share was 1%. Microsoft now seems to be more focused on increasing its foothold in the global tablet market.

Microsoft plans to make the new device public in an event to be hosted in New York on May 20. Microsoft will also unveil other new Surface models at the same event. The new tablets are the ones which are powered by Intel processors. Microsoft has now pulled away from NVIDIA. Earlier, its tablets were using chips manufactured by NVIDIA that used ARM technology.

With Microsoft striving hard to expand its gadgets business (tablets, smartphones, Xbox), this directly benefits various chipmakers. Now with news that Microsoft is keen to use Qualcomm chips, the chipmaker should benefit.

Qualcomm Should Benefit from Microsoft

Qualcomm (QCOM) has been a supplier of processors for various leading smartphone manufacturers. Microsoft is showing interest in Qualcomm chips for the new series of tablets because Snapdragon processors and modems are the basis of almost all of the top-selling smartphones, including Samsung Electronics’ Galaxy line.

Last year, Qualcomm increased its chipset portfolio with an objective to diversify from its core segment of smartphones and tablets. It now also focuses on the raw market of devices in the living room of the future homes. The HD processor of Qualcomm has enabled the company to explore the market of devices like Smart TVs, set top boxes and digital media adapters.

Qualcomm has always strived to establish its dominance in the tablet market where companies like Apple are having a stronger foothold as it uses in-house chips. Furthermore, Qualcomm failed to explore the big Chinese tablet market due to the price factor, as Chinese tablets are low cost and could not afford chips manufactured by Qualcomm. Qualcomm is all set now to establish a stronger foothold at tablet manufacturers post the launch of Microsoft’s tablet with Qualcomm inside.

Qualcomm has also introduced two next-generation Snapdragon chips for smartphones and tablets, the Snapdragon 810 and Snapdragon 808. The sampling of these chips in various devices should be commencing later this year. These newly released chipsets integrate Qualcomm's fourth-generation Cat 6 LTE Advanced multimode modem and the mobile chip maker's own Adreno graphics processors, also supporting the Qualcomm RF360 Front End Solution.

Qualcomm is also focused on 64-bit leadership, throttling its availability across all product levels while maintaining a dedicated commitment to the continued development of its own next-generation custom 64-bit CPU micro-architecture. More is expected from the company by end of this year.

Fundamentals and Conclusion

Qualcomm trades at around 19.3 times earnings. Qualcomm might be expensive, but the company is deeply entrenched into mobile and is looking to diversify further into various growth markets, namely wearables. Moreover, its earnings growth expectation of 16.67% makes it a solid pick for the future. Hence, investors looking to benefit from smart homes and automobile infotainment should definitely consider Qualcomm.

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