Qualcomm Relies on Samsung and Apple More Than You Think

By Evan Niu, CFAFool.com

It's common knowledge that Qualcomm is at the center of the smartphone revolution. The company provides the critical technology at the heart of all modern phones (earning royalty revenue in the process), and it also makes crucial components like applications processors and cellular baseband modems, among others.

Meanwhile, Apple and Samsung dominate the global smartphone market, particularly the high end. Those two companies combined grabbed 39.3% of unit market share in 2014, down modestly from the 46.1% share they scored in 2013. It should be no surprise, then, that Apple and Samsung are rather important to Qualcomm's top-line sales.

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But you might be surprised with just how much Qualcomm relies on the Mac maker and South Korean conglomerate.

Reading between the linesI happened to be perusing Qualcomm's 10-K the other day (it's what we Fools do in our spare time), and I stumbled upon this interesting nugget:

That means effectively half of Qualcomm's business comes from Samsung, Apple, and their respective suppliers. Moreover, that reliance is increasing.

Source: 10-K.

What happens if Qualcomm eventually loses one or both of these key customers?

Losing Samsung?This is precisely why it was such a major blow to Qualcomm when Samsung dropped the Snapdragon 810 in the Galaxy S6 earlier this year, instead opting to use its own Exynos processors. Shares dropped 1.2% when news broke in January that Samsung was making the switch.

This is how one of Samsung's three CEOs, J.K. Shin, explained the decision to The Korea Times, while affirming that the relationship between the two companies remains strong:

Qualcomm CEO Steve Mollenkopf still feels confident that he can win back Samsung the next time around, but losing the Galaxy S6 certainly hurt last quarter's results.

Losing Apple?Apple has never used a Snapdragon processor in the iPhone, instead using its own A-chips. However, Qualcomm has been Apple's exclusive supplier of cellular baseband modems for several years, and Apple is the quintessential volume customer. Apple has shipped 210 million iPhones over the past four quarters, each sporting a Qualcomm modem.

There are signs that Apple is working on developing its own baseband modem. If true, it could still be years until Apple has a competitive solution ready for prime time. Strategically, it makes a lot of sense for Apple to design its own modem, but this is a tall order to fill when you consider how long Qualcomm has been at this game.

The possibility of one day losing the iPhone slot is a major risk factor that Qualcomm investors cannot ignore, even if it's not imminent.

The article Qualcomm Relies on Samsung and Apple More Than You Think originally appeared on Fool.com.

Evan Niu, CFA, owns shares of Apple and Qualcomm. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. 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.

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