Technology is advancing quickly for communications chipsets, giving Qualcomm(QCOM) the opportunity to capitalize on this trend.  Qualcomm is a global leader/producer of digital communications products. The company’s chipsets are used in smartphones and other mobile devices, broadband equipment, networking equipment, and other consumer electronics.

Qualcomm has been a leader in developing 3G, 4G, and now the more advanced 5G technology. The newer 5G technology will enable more reliable connections as a result of lower latency and wider bandwidths, giving it high reliability for time-critical applications as compared to previous technology such as 4G.  Some potential applications for 5G include: autonomous vehicles, emergency communications, smart cities, factories of the future, health care, data analytics, and more advanced mobile device performance.   

The company operates three segments:

1. The QCT segment comprised about 76% of total revenue and 46% of total earnings before taxes [EBT] based on 2018 sales figures.  The QCT segment produces integrated circuits and system software for their customers’ end products. This segment develops integrated circuits and software for various applications.  The products are sold, while the software is licensed to manufacturers that use Qualcomm’s chipsets. 

Qualcomm designs both the baseband integrated circuit and the supporting system.  This includes RF technology, power management, and wireless connectivity (Bluetooth/Wifi). Qualcomm’s products that enable the voice and data communications in mobile devices include: Mobile Station Modem, Qualcomm single chip, and the Qualcomm Snapdragon products. 

2. The QTL segment comprises 23% of Qualcomm’s total revenue and 54% of total EBT. The QTL segment licenses Qualcomm’s intellectual property to other companies.  The company only licenses their cellular standard essential patents, which is for their 3G, 4G, and 5G technology for single and multi-mode devices. Qualcomm has over 300 licensees.  

3. The QSI segment comprises less than 1% of total revenue and less than 1% of total EBT. QSI invests in early stage companies in auto, IoT, mobile, data center, and healthcare industries. 

Strengths

Qualcomm is a global leader in 3G, 4G, and 5G chipsets. The company currently produces chipsets for Android & Windows mobile devices and for other mobile client software.  Qualcomm stands to benefit as 5G is just now being rolled out in 2019 with many years of growth ahead as the prevalence of the technology and its applications increase. 

Qualcomm has a large amount of intellectual property.  The company has over 130,000 patents and patent applications pending. The company has been able to derive over half of its EBT from less than a quarter of their total revenue from licensing their IP. 

The company’s Snapdragon processors are used in vehicle infotainment systems for 17 automakers. The automotive market is large in the U.S. – About 17 million vehicles were sold in the U.S. in 2018. The National Automobile Dealers Association [NADA] is forecasting sales for 2019 to be 16.8 million. The global market is also huge. Global vehicle sales in 2018 were approximately 78.7 million. Sales for 2019 are expected to be between 78.7 million and 79 million.  Global sales of electric vehicles are expected to increase at a CAGR of 32.57% to reach about 10.8 million units by 2025 (up from 1.5 million units in 2018). 

The company is a lead developer of C-V2X (cellular vehicle to everything) technology.  This technology along with 5G is what will make autonomous vehicles a reality. This represents another future growth market for the company for the Qualcomm 9150 C-V2X chipset, which will allow vehicles to communicate with other vehicles and with the surrounding infrastructure. 

Qualcomm has strong R&D, spending over $5 billion per year or about 25% of total revenue. These strong investments drive innovative technology, which allows Qualcomm to remain on the cutting edge of new tech such as 5G and C-V2X.  

The company achieves double-digit returns and margins. 

 source: SeekingAlpha

source: qualcomm.com – Snapdragon 855 – system on a chip

Weaknesses

Apple (AAPL) was lost as a customer for Qualcomm’s modems in new iPhones. The iPhone’s new product launches beginning in the fall of 2018 now use competitors to supply the modems. There has been ongoing disputes and legal issues between Apple and Qualcomm. This strained relationship led to Qualcomm being limited to Windows and Android-based devices and Apple’s pre-2018 iPhone released models. 

Qualcomm obtains a large amount of revenue from a small amount of customers. The loss of additional customers could lead to a decline in revenue. An as example, the loss of Apple as a customer for the newest version of the iPhone led to an expected 10% decline in 2019 revenue per consensus estimates.

While the company achieves a double-digit ROE, the ROIC lags at about 9%. Higher ROIC in the double-digits is preferable. So, there is some room for improvement with returns on invested capital.   

Qualcomm uses a fabless production model.  As a result, the company depends on a limited amount of third-parties for the procuring, manufacturing, and testing of their products. Therefore, Qualcomm is at risk for supply/manufacturing disruptions from these companies. 

Opportunities

Capitalize on the development of 5G, IoT, AI, and C-V2X (smart vehicle) technologies. Qualcomm can use their R&D strength to create chipsets that allow wireless connections for these technologies to be fast and reliable.  Qualcomm has the opportunity to advance their chipsets to be increasingly used in these emerging technologies.

The growth opportunity is large as 5G is expected to have 1.3 billion connections globally (12% of total cellular connections) by 2025. The amount of IoT devices being used globally is projected to grow from 7 billion in 2018 to 34.2 billion by 2025, growing at a CAGR of 10%. 

Qualcomm could resolve issues with Apple over the long-term. Although tensions are high right now between the two companies, an improved relationship could develop over a few years. As a result, Qualcomm could gain business back from Apple. 

Strategic acquisitions remain another growth opportunity. Although the attempt to acquire NXP Semiconductors (NXPI) failed, Qualcomm could seek out other companies that could be a good fit and still gain government approval. 

Threats   

The company faces anti-trust lawsuits from various sources mostly over their licensing policy. Complaints about Qualcomm came from the FTC, South Korea, China, the E.U., Taiwan, and Apple. These lawsuits can strain relationships and lead to the loss of current or potential new business. Qualcomm will have to maintain a good balance of charging the right amount for their products & from patent licenses to grow their business without alienating themselves from customers and government agencies. 

Competition remains a threat. Qualcomm faces competition from Intel (INTC), Samsung (OTC:SSNLF), Broadcom (AVGO), CirrusLogic (CRUS), Nvidia(NVDA), and others. The dispute with Apple led to Intel taking business from Qualcomm for iPhone modems. 

Government regulations and tariffs could negatively affect Qualcomm’s business or the business of their customers.    

Long Term Business Outlook for Qualcomm

Qualcomm has been accused of being a monopoly from competitors and government agencies. This creates risks from lawsuits and in growing their business.  However, there is no shortage of growth for 5G, AI, IoT, and smart vehicles for the foreseeable future. As a result of this increasing demand for ‘smart’ connected products, Qualcomm is likely to get their piece of the pie – even if they do face some legal issues in the process.

Qualcomm’s chipsets will be needed to enable the reliable wireless connections involved with these technologies. While plenty of competition exists, the large amount of connected devices is also large enough for many companies to benefit and grow. If the company executes properly, Qualcomm could achieve above average earnings growth over the next five years.