Qualcomm’s (QCOM, Financial) decision to buy NXP Semiconductors (NXPI, Financial) is a huge move by the mobile chipset maker that has been rattled by the slowdown in smartphone sales around the world. The $47 billion acquisition is the largest buyout in the semiconductor industry in which all companies except for NVIDIA (NVDA, Financial) are struggling to keep their top lines moving.
Qualcomm’s revenue is entirely dependent upon global smartphone sales. Competition is increasing, and the market has slowly become mature over the years. Though the need for smartphones is still high worldwide, one cannot expect the double-digit growth the industry enjoyed in the last 10 years to continue indefinitely.
After watching its revenue decline in the last two years, Qualcomm did an excellent job in cutting costs, reducing overhead and boosting its operating income. The company returned to revenue growth during the second half of the current fiscal, but the damage done during the first half of the year resulted in the company posting a 7% decline for the full fiscal.
Qualcomm desperately needed an alternate revenue stream that could supplant its current revenue streams that are directly dependent on smartphone sales, and NXP Semiconductors’ expertise in the automotive segment – a current growth segment that is expected to steadily grow in the future – is the ideal revenue driver for the future.
NVIDIA has gained steam in the last several quarters in the auto segment and, during the second quarter, NVIDIA’s revenues from that segment grew by 67.61%, from $71 million last year to $119 million. This segment, driven by the industrywide obsession to get driverless cars on the road, is bound to grow in the future along with the ever-increasing penetration of smart-connected devices in our cars. Technology is slowly increasing its presence in the automobile industry, and semiconductor companies such as NXP and NVIDIA have a huge role to play in its development.
"NXP, particularly after acquiring Freescale (FSL, Financial) last year for $12 billion, has a leading position in areas where Qualcomm is weak or not present, including chips for current cars, future self-driving cars, mobile payment devices as well as sensors for drones and other smart devices." –Â Fortune
The deal is indeed beneficial to Qualcomm in several ways as the addition of NXP provides it exposure to new segments while strengthening its offerings in mobile, automotive, Internet of Things, RF and networking. The combined entity is expected to hit annual revenues of more than $30 billion.
With the NXP acquisition Qualcomm will become a significant player in the auto market. It will be interesting to watch Qualcomm, NVIDIA and Intel (INTC, Financial) fight each other in this segment although I expect Qualcomm and NVIDIA to run away with it.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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