Why Qualcomm's Slump will not Last

The smartphone industry is going through a spasm, but Qualcomm has a shot at outlasting it

Author's Avatar
Aug 19, 2016
Article's Main Image

Qualcomm (QCOM, Financial) is the world’s leading smartphone chipmaker. According to ABI research, Qualcomm was the undisputed leader in LTE baseband chipsets, with a 65% market share in 2015. Long-Term Evolution, or LTE, is a 4G wireless broadband technology that has been growing steadily over the years.

Where Does Qualcomm Stand on Revenue Growth Against Industry Growth?

LTE infrastructure expenditure is expected to hit $45.8 billion by 2020 and LTE market share has grown from a mere 3% in 2011 (of the smartphone market) into an estimated 16% by 2018.

Ej-F1O3etDFVeQ3i_gCyTC2o7AGXcZosXch5YvijvVM6Kw1_7LBctYdzGwwqStVLlySZy7pj800Lkp9Gh92oBMxYI3SSISywDYcvkMqLPOz1Fop6xfcJTvjw4qySmUnlTq5_tpqa

Source: Strategyr

The LTE market is growing and is expected to grow at 78.6% CAGR through 2019 and Qualcomm - as the market leader in that technology - stands in the best position to benefit from such growth.

As such, you would expect industry-pace growth from the market leader, but that is not the case.

The company’s revenues have come down during last year to $25.28 billion, after growing from $7.5 billion in 2006 to $26.48 billion in 2014.

The sales decline has continued this year, as the company reported sales of $17.37 billion in the first nine months of this year compared to $19.825 billion last year. Qualcomm is guiding its revenue to be in the $5.4 to $6.2 billion range for the subsequent quarter, which means even if the company hits the top end of the range, Qualcomm’s total revenue for the current fiscal will only be around $23.5 billion, significantly lower than their results in 2015.

OrHf0HfP9PtC8-5cmSZO0lUezQsdXJAaj2l3Sf8QBB9ZZCAb-HlDfoK-s5X-vgwxeJ2knftItCfu_D6DbiiGagY-jHBW2XCsfzPtxdQVnx0nQifq4It339YiYYapYRMoZTq2hcB5

Industry Outlook: Mid to Long-Term

The mobile chip world is controlled by Mediatek (TPE:2454, Financial) and Qualcomm and both companies’ fortunes depend entirely on the number of smartphones sold around the world. According to Gartner (IT, Financial), smartphone sales during the 2016 second quarter grew 4.3% compared to last year, a far cry from the growth we experienced in the last few years. That slowdown has directly affected Qualcomm and any significant growth can only happen as 4G investments around the world ramp up.

Even the world’s biggest smartphone market - China - is going through a slowdown and a lot depends on how much this market can yield over the next few years. Qualcomm says that it expects 3G/4G device sales in fiscal 2016 to grow around 8% for the year. But Xiaomi, the Apple Inc. (AAPL, Financial) of China, sold only 10.5 million smartphones in the People’s Republic compared to the 17.1 billion they sold last year. More to the point, Xiaomi is one of the largest clients of Qualcomm and the drop in their sales has hurt both companies.

R4TrsT-mRYCO2SWV8IjJA8AJZKW04mZREddyBOoMWi6ySxbwKZh5tNZ6SjcXq8jwwNpoLrbg1OBtND5HbEN1B8osOkyLeGEYoV6UOXk1hOSvuknxYfimGLefHbuyCGW8Buu3Bx0Z

Source: Businessinsider.

Forced by the slowdown in the sales numbers of its top clients, Qualcomm has been cutting costs to shore up its bottom line and is now waiting for 4G investments to accelerate because that is the key driver of demand for its LTE chipsets.

“Qualcomm announced last year that it was cutting about 15 percent of its workforce amid reduced demand and lower sell through in China. This quarter, the company was able to deliver stronger numbers, improving investor and analyst sentiment on the stock.”

- CNBC

V_T99F0agMFQF_T97PgjAOFcwUjoVGwWMbvo_pTse-NkO_NN1_TXvzruBf_8HF3VBcA1rm9DOezD2eS63dh_EzUIKRALGC6mcV9dfoMGu0ikwABe9vYourg9VKxVCFfLiksqNgLy

How Qualcomm Fits into the Smartphone Puzzle

So it is clear that the drop in smartphone sales around the world is not only affecting smartphone makers themselves, but also the upstream component makers like Qualcomm. It is clear that Qualcomm is in short-term pain, but it is only a matter of time before the future catches up to them.

To elaborate, as video consumption grows and video content grows on the internet along with mobile usage, people are going to increasingly depend on having LTE data speeds to serve them. That means an opportunity to invest in LTE infrastructure, which will eventually lead to a demand for more LTE-capable devices, which Xiaomi and other Chinese companies are well-suited to produce.

It will take time, but Qualcomm will be right in the path of success when that happens.

In a way, Intel (INTC, Financial) is going through the exact same situation because of the PC market, but at least Qualcomm has a clear light at the end of the tunnel.

As LTE draws more investments across the world on its way to that 16% market share in 2018, we are likely to see Qualcomm grow with it. For now, the company needs to rough it out, cut out some fat and make sure they stay in the game. As far as I can see, Qualcomm is a relatively safe bet, but you should be willing to hold on to it for a few years.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

Start a free 7-day trial of Premium Membership to GuruFocus.