Qualcomm losing market share to Intel?Side note:
Pure speculation on my part but PC stayed over at the Inn where the AGM was held and was heading to New Jersey the next day. I forgot about that until I read the article.
Seems Qualcomm needs something new to stay competitive with Intel.
Qualcomm's competitive situation with Intel is unappealing
It's Time To Marry Intel And Dump Qualcomm
Sep. 14, 2014 8:42 PM ET
| 7 comments | About:
Qualcomm Inc. (QCOM),
INTC
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Summary
· Qualcomm's competitive situation with Intel is unappealing.
· Low-end will not drive revenue growth, just volumes.
· Intel can be price competitive in mobile and still generate meaningful accretion to financial results making it the bigger winner going forward.
While Qualcomm (NASDAQ:QCOM) has been a good holding for tech investors who wanted exposure to mobile, I think now is a good time to part ways with Qualcomm. The truth is, there's very little Qualcomm can do to drive growth other than to compete in the low-end, a market in which Intel (NASDAQ:
INTC) has demonstrated considerable interest in.
Qualcomm's sales growth has declined considerably in the current fiscal year, and further developments in the space indicate that this won't change. Meanwhile, Intel is well positioned to grow in both mobile and data center, and has a much larger capital return program in place to retain shareholders.
This leads me to the conclusion that it's time to load up on Intel and dump Qualcomm. I know, it's hard to date two good looking chicks, but at some point you got to choose one over the other.
Qualcomm's competitive situation with Intel isn't good
As I have mentioned in prior articles, Qualcomm may have further difficulty with holding onto its dominant position in both the high-end and low-end. However, it's the low-end smartphone and feature phone market that Intel is particularly interested in. In the low-end, inferior performance specs are perfectly acceptable, and if Intel markets its low-end solutions at similar pricing levels to Qualcomm, there's no denying that it may cripple Qualcomm's growth, as the vast majority of smartphone shipment growth isn't happening at the high-end, but rather at the low-end.
In this scenario, Qualcomm doesn't really have as much flexibility because it would erode its margins if it were to price its higher-end solutions at lower pricing levels just to remain competitive with Intel. Furthermore, Intel seems to have gained significant design wins in tablets, and the CEO is pretty optimistic about the rollout of SoFIA (smart or feature phone with Intel architecture).
In Qualcomm's fiscal year 2014, the company will retain a sizable share of the mobile market, based on shipment projections from Qualcomm:
We expect calendar year 2014 3G/4G device shipments to be approximately 1.3 billion globally. However, our estimate of calendar year 2014 3G/4G device shipments that we currently expect to be reported to us is approximately 1.04 billion to 1.13 billion, which is adjusted for units that we believe may not be reported to us, are in dispute or are currently unlicensed.
There's a discrepancy in the reported and actual figures, because some Chinese OEMs are under-reporting sales, which translates into less licensing revenue for Qualcomm. Intel's CEO really likes the opportunity presented in China even though it comes with its own set of complications. Unlike Qualcomm, Intel can source components to OEMs from its own foundries, which improves the odds of sales recognition.
According to Brian Krzanich:
Phones are a little bit different and we're looking at those more opportunistically. We're trying to figure out where is the best place to play it. Like I said in most of the developed countries there are two big players but you move into China, it is much more of an open market like that.
However, Intel's focus on the sub $100 feature phone market becomes a little more understandable based on the market potential of the low-end.
(click to enlarge)
Source: IDC
Assuming Intel can gain a sizable share of the 744.9 million in shipment volume feature phones generate, the company can return its mobile division to break even by 2016 or so. To reverse the burn rate of $1 billion per quarter will require significant volume, along with on-going tablet wins.
Working with a $50 ASP, at 744.9 million in aggregate volume, the feature phone market is a $37.245 billion market. Because Intel is expected to package all the internal components into a single integrated circuit, Intel components may make up 20-30% of the final device cost (this is based on component cost analysis from other bill of material break downs), which translates into a $7.44 billion to $11.172 billion market that both Qualcomm and Intel can compete for.
Volume will not drive revenue growth in the case of Qualcomm
The low-end may be a large enough of a market for Intel's mobile division to break even. The combined impact from Intel's low-end gains, paired with tablet gains, will diminish Qualcomm's growth rate even though it's exposed to the aggregate growth trajectory for smartphone devices.
According to IDC:
This IDC study examines the worldwide smartphone market for 2013-2018. IDC believes the smartphone market, having reached 1.0 billion units shipped in 2013, will increase 19.3% and reach a total of 1.2 billion units shipped in 2014. From there, total smartphone shipments will reach 1.7 billion units in 2018, resulting in a CAGR of 11.5%.
Admittedly, the smartphone market is expected to grow at a much slower rate here on out. Much of that growth will be in the form of converting feature phones into smartphone devices, and certain pockets of the world have a rapidly emerging middle class, which will drive organic growth in the form of device activations. However, the painting is becoming a little clearer by the day Qualcomm's growth rate will slow due to competition from Intel, a maturing high-end smartphone market, along with growth limited to lower-tier devices. The low-end will generate volume, but the diminishing sales per unit will diminish the amount of revenue that Qualcomm will actually recognize. But in the case of Intel volume growth will have meaningful impact to financial results because it never had any volume in the first place.
Source: Ycharts
In the most recent quarter, Qualcomm generated 9% y-o-y revenue growth. However, MSM chip shipments grew by 31% in the same period. Volume growth was three times revenue growth, and even if Qualcomm were to generate more volume, from the low-end through Snapdragon 210 (the chip solution aimed at the sub $100 market), the impact to top line results won't be as meaningful going forward.
Conclusion
I think investors should avoid Qualcomm due to diminishing growth in the high-end, paired with a competitive dynamic that heavily favors Intel over Qualcomm. Intel has demonstrated that it can retain its edge in manufacturing tech, and it's likely that this trend will continue. Furthermore it's unlikely that Qualcomm will capture new verticals in which it can generate the kinds of sales that it has enjoyed in mobile and tablet. The move to sub $100 smartphones offers meaningful accretion to Intel, whereas the impact to Qualcomm won't be very meaningful.
Intel offers a much larger capital return program when compared to Qualcomm reversing losses in its mobile division will boost gross margin figures even further. Meanwhile the data center group will continue to grow at mid to upper teen growth rates. Intel's net income growth will eventually outpace Qualcomm, and from my experience higher growth is rewarded with corresponding stock appreciation.