Qualcomm (NASDAQ:QCOM) surprised everyone with its plan to enter the wearable gadgets market. It has launched the first iteration of its smart watch called Toq. The watch is designed to serve as a second display to smartphone. This can be considered a smart move looking at the woes of Intel due to a shrinking PC market.
Investors actually never thought of Qualcomm entering into the market so quickly given its deep entrenchment into the mobile computing space, just like Intel was tied up with chips & processors for the PC market and diversified very late. Perhaps, Qualcomm might be having such "smart surprises" in store for the future aimed at pleasing investors.
Strong as It Is
Qualcomm is strongly present in the mobile computing space and was an early mover in the 4G LTE connectivity field. The recent quarterly performance of the company has improved considerably. Qualcomm exceeded the consensus estimate for adjusted EPS excluding special items. The company increased its MSM shipment growth by 22% and shipped 172 million MSM (Mobile Station Modem) chips as compared to the same quarter last year.
- Warning! GuruFocus has detected 6 Warning Signs with QCOM. Click here to check it out.
- QCOM 15-Year Financial Data
- The intrinsic value of QCOM
- Peter Lynch Chart of QCOM
Qualcomm's Snapdragon 800 quad core chipset supports 3G/4G LTE modem with ultra HD graphics. In addition, it also offers a better battery life and faster clock speeds of up to 2.2 GHz. This makes it popular in the high-end smartphone segment. The company will also supply Snapdragon 800 processors to Samsung for Galaxy S4 LTE-A phones.
The company is strongly attached to Apple's iPhone and iPad products as well as many Android-based devices, including the best-selling products from Samsung (OTC:SSNLF), Sony (SNE), HTC to name a few. It also surpassed Nvidia's (NVDA) Tegra line of chips in the second iteration of the Nexus 7 tablet from Google. Therefor, Qualcomm is well positioned for growth even under different competitive and market scenarios.
The deployment of 4G LTE gaining momentum in the emerging markets of China and India should push the demand for Qualcomm's Snapdragon 800 quad core processors. Qualcomm is planning to gain through its partnership with Bharti Airtel, the largest telecom operator in India. Given the fact that India has a huge telecom market with only 2% penetration of broadband service puts exciting opportunity for the company.
Moving Into More Markets
All major players in the smart devices industry are making moves to gain a foothold in the Chinese market being the largest market for smartphones. China Mobile (CHL), the world's largest telecom operator, has plans to deploy around 20,000 TD-LTE base stations by the end of 2013. It has selected Snapdragon and Gobi-based LTE-TD smart phones, since they are highly compatible with its network. Going forward this is bound to create a huge growth opportunity for Qualcomm.
The penetration of smartphones in emerging markets is extremely low at just only 10% of the total population, according to Gartner. The global smartphone demand is expected to grow at an annual compounded rate of 20% from 2012 to 2017. Gartner is expecting a huge annual increase of 67.9% for the tablets in 2013 as this segment continues to gain market share at the expense of the declining PC market.
2014 is already being forecasted as a breakthrough year for smartwatches. Qualcomm plans to launch its own smart watch called Toq in the fourth quarter of 2013. Canalys projects that smartwatches sales will be exploding by the end of 2014 when vendors will ship more than 5 million units, a 900% increase from the number of units Canalys expects vendors to ship this year.
Broadcom and NVIDIA Could Be Worries
In the wireless segment, Broadcom (NASDAQ:BRCM) is a major competitor of Qualcomm. Around 50% of Broadcom's revenue comes from this segment. But Broadcom has already lost a huge chunk of low-cost smartphone market to Qualcomm. Qualcomm's connectivity chips were chosen for the Motorola Moto X above Broadcom's products and the Samsung Galaxy S IV Mini. In addition, Broadcom's main earning technology is 3G solutions which are expected to be replaced in the next few years by 4G LTE solutions where Qualcomm already is a leader.
Most of the analysts still remain very bullish on Broadcom even after disappointing earnings primarily because the stock is undervalued. However, one should think that if the stock is really undervalued then why has negative sentiment persisted for so long?
Broadcom's market sentiment could further deteriorate if Apple decides to use Qualcomm's connectivity chips. The new RF360 Front End Solution chip of Qualcomm is expected to allow the iPhone to run on all 2G, 3G and 4G LTE networks and thereby allow Apple to save on costs which would become critical for the mid-range/low-end market segment.
Nvidia is another competitor of Qualcomm in the mobile computing space through its Tegra processors, with the latest launch of Tegra 4. Nvidia has partnered with th Chinese smartphone manufacturer Xiaomi, which is quite popular in China through sales of its iPhone beating handset.
Xiaomi appointed Hugo Barra, of Google to lead the company's international business development and prepares to take on Apple and Samsung overseas. In a long run, Xiaomi's win is an important win for Nvidia.
Microsoft's Surface 2 tablets will also be powered by Nvidia's Tegra 4 platform. This is another important win although the Surface tablets are yet to gain popularity in the tablet market. Windows RT was a failure. There’s a rumor in the tablet space that Nvidia is coming up with its own Tegra 4 powered tablet later this year.
In the mobile segment, Qualcomm is way ahead of peers. The company commands a major share of the global baseband market and plans to extend its expertise further by entering into the next popular emerging category of smartwatches. Therefore, investors looking for an ultimate investment opportunity in mobile must consider Qualcomm for their portfolios.