1 Misconception Around Qualcomm, Inc.'s Chip Business

By Ashraf Eassa Markets Fool.com

Foolish colleague Leo Sun recently penned an extensive piece giving his view of where wireless giant Qualcomm (NASDAQ: QCOM) will be in 10 years.

Continue Reading Below

Image source: Qualcomm.

In his column, he makes the following observation:

Qualcomm's "best in breed" high-end Snapdragon chips are still used in many flagship Android devices, but it will likely keep losing market share due to the commoditization of the smartphone market and the growing importance of low-end and mid-range devices. To offset that slowdown, Qualcomm's QCT (chipmaking) division must diversify into adjacent markets.

Leo is correct that Qualcomm's high-end Snapdragon processors are found in a large chunk of the high-end Android smartphones sold today. Samsung's (NASDAQOTH: SSNLF) flagship Galaxy S and Galaxy Note families, for example, use Qualcomm's top Snapdragon chips in certain geographies, as do phones from other well recognized brands like HTC, LG, Xiaomi, and many others.

However, where I disagree with Leo is on his implicit view that the "growing importance of low-end and mid-range devices" is necessarily a bad thing for Qualcomm. It's not -- here's why.

Continue Reading Below

Qualcomm has an extensive product portfolio

Qualcomm's premium smartphone chips, like its recently announced Snapdragon 835 chip, tend to get much of the press and the fanfare. However, this emphasis on Qualcomm's most powerful chips can sometimes create a false impression that the wireless chipmaker doesn't have a particularly strong portfolio, or a portfolio at all, in the low-end and mid-range smartphone market.

That couldn't be more wrong.

One of the reasons that Qualcomm's mobile chip business has been so successful is that it invests heavily in building a top-to-bottom product stack. In Qualcomm's marketing literature, the company segments the market in the following manner:

  • Snapdragon 800-series (premium)
  • Snapdragon 600-series (high-end)
  • Snapdragon 400-series (mid-range)
  • Snapdragon 200-series (entry level)

Within each of these segments, Qualcomm delivers chips intended to offer competitive features and cost structure. For example, the 800-series chips will cram in the fastest processor, graphics, wireless, camera, and other capabilities, and will usually be manufactured on the best manufacturing technology available to Qualcomm from the contract chip manufacturers.

The 600-series, on the other hand, will have lower performance, fewer features, and be built on older, more mature manufacturing technologies. Features, performance, and so on scale down as one goes down the product stack.

So even if the low-end and mid-range of the smartphone market continue to outperform the high-end/premium portion of the market, Qualcomm is ready to compete with a whole portfolio of products targeted at those markets.

So, it's all upside for Qualcomm?

It's important to make a critical distinction. If low-end and mid-range phones cannibalize the high-end/premium portion of the market, then that's a net negative for Qualcomm, as its high-end and premium chips generate more revenue and gross profit dollars per unit.

However, it's not clear that this is what's happening. If no low-end/mid-range smartphones existed and everything was a "premium" phone, would Qualcomm really be seeing a much richer product mix than it does now?

I contend not. Instead, I would expect smartphone unit volumes to simply be much smaller. So, the robust growth in the low-end and mid-range is, in my view, net additive to Qualcomm's chip opportunity and thus revenue/profit opportunity.

There will of course be some level of substitution of high-end smartphones for lower-end ones among certain buyers, but the sheer volume that lower smartphone price points have opened up almost certainly more than makes up for any substitution that's going on -- from Qualcomm's perspective.

10 stocks we like better than Qualcomm
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Qualcomm wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool has a disclosure policy.