Qualcomm Inc. Is Running out of Room to Grow... What's Next?

By Markets Fool.com

Qualcomm (NASDAQ: QCOM) has rallied more than 40% over the past six months, thanks to robust sales of its new Snapdragon chips and the resolution of various patent licensing disputes in Asia. The chipmaker's top line growth also finally turned positive again in the third quarter with 3% sales growth, breaking itsfour-quarter streak of year-over-year declines.

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Image source: Qualcomm.

However, Qualcomm isn't out of the woods yet. The chipmaker is still losing ground to cheaper rivals like MediaTek and Spreadtrum, as well as first-party chips from major OEMs like Apple, Samsung, and Huawei. Its licensing unit still faces regulatory scrutiny in major markets like South Korea and Taiwan. As a result, analysts expect Qualcomm to post an 8% decline in both sales andearnings this year.

The good news is that Qualcomm knows that it needs to diversify its business beyond mobile chips and licensing fees. Let's take a look at few ways Qualcomm plans to keep growing over the long term.

Wearables

Research firm IDC expects global shipments of wearables to soar from110 million this year to 200 million by 2019, thanks to rising demand for smartwatches. That's great news for Qualcomm, which already controls 80% of the Android Wear smartwatch market with itsARM-based SoC designs. Non-Android Wear device makers like Samsung also install Qualcomm chips inmany of their devices.

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In the past, many high-end smartwatch makers usedQualcomm's Snapdragon 400 SoCs, which are also used in entry-level smartphones, to power their devices. But earlier this year, Qualcomm launched a new line of processors for wearables called Snapdragon Wear, which were built from the ground up for wearables with a heavier emphasis on power efficiency, connectivity, and motion tracking capabilities.

These chips, which can power both low-end fitness trackers and high-end smartwatches, will widen Qualcomm's moat against challengers like Intel (NASDAQ: INTC), which recently fumbled in that market with an overheating-related recall of its Basis Peak smartwatch.

Image source: Qualcomm.

Drones

The global drone market could grow from $2 billion today to $127 billion in 2020, according to PWC. The growth could be fueled by rising demand in the consumer, delivery, defense, photography, agricultural, and enterprise markets.

To tap into that market, Qualcomm launched Snapdragon Flight, a low-cost development kit for drones powered by its smartphone-based Snapdragon 801 processor. The platform packs that processor (which has an integrated modem) with a real-time flight control digital signal processor, Wi-Fi and Bluetooth connectivity, and an automotive-grade GPS into a package half the size of a credit card. OEMs can then use that kit as a turnkey solution to quickly launch their own low-cost drones.

Snapdragon Flight represents another way for Qualcomm to widen its moat against Intel, MediaTek, and other chipmakers that want to profit from the growing drone market. Chinese drone maker Yuneec was the first major customer to start using the Snapdragon Flight platform, which was ironic because Intel was one of Yuneec's major investors.

Connected cars

The connected car market could grow from $34.5 billion to $126 billion between 2015 and 2020, according to PWC. This makes it a huge growth market for major chipmakers like Qualcomm, which is diversifying away from smartphones; Intel, which is diversifying away from PCs; and Nvidia (NASDAQ: NVDA), which is expanding away from GPUs.

Qualcomm's play in this competitive market is Snapdragon Automotive, which modifies its top-tier 64-bit Snapdragon 820 mobile SoC for use in infotainment systems. Qualcomm revealed those chips, the Snapdragon 820A and Snapdragon 820Am, atCES in January this year. The "Am" variant has an integrated LTE modem which provides vehicles with stand-alone internet connections. Volkswagen's Audi, always an early adopter of new automotive technologies, has already started installing the chips in some of its 2017 vehicles.

That vote of confidence is encouraging, but Nvidia has a clear first-mover's advantage in this market with customers like Audi, BMW, Daimler's Mercedes-Benz, Honda, and Tesla all using its technology. Intel has also carved out a niche by supplying chips for select vehicles from Hyundai, BMW, Kia, andNissan's Infiniti.

It's all about the Internet of Things

Qualcomm's investments in wearables, drones, and cars all reflect the growing importance of the Internet of Things (IoT) market, which connects all those objects to each other and the cloud. This market also includes home automation devices and data centers, two nascent markets where Qualcomm is also gradually establishing a presence.Intel estimates that a whopping 200 billion devices could be connected to the IoT by 2020.

These new businesses might not generate much revenue for Qualcomm over the next few quarters, but they will likely grow over the next decade and reduce the weight of traditional mobile devices on its top and bottom lines. When that happens, Qualcomm will continue growing as a more diversified chipmaker with formidable market shares across multiple markets.

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Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple, Nvidia, Qualcomm, and Tesla Motors. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.