Can This Telecom Giant Continue Dominance in Chipset Sector?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The communication equipment industry is a large sector, making up both business and government agencies. There is heightened competition among the telecom companies that can provide 3G technology, 4G LTE devices, and application for smartphones and tablets.

When Qualcomm (NASDAQ: QCOM) announced that it will supply Samsung with its Snapdragon processor for the latest Galaxy smartphone, it made me wonder when the company’s dominant position as a supplier of chips for smartphones and tablets will end. Below, I will explain why its diverse customer base, combined with the worldwide adoption of smartphones – along with the continued growth of its chip shipment, will allow Qualcomm to continue its dominance in the sector.

Diverse customer base

Over the past few years, Qualcomm has acquired a variety of customers to improve its margins in the communication equipment sector. Customers such as Apple, Samsung, BlackBerry, and Microsoft have allowed Qualcomm to expand its chipset business, generate royalties from its CDMA business, and strengthen its investments in the LTE sector.

However, Qualcomm’s success has attracted competition. Rival companies are introducing LTE chips in both developed and emerging economies.  Qualcomm has taken steps to stay ahead of the competition through the development of products like the best-in-class Snapdragon 800 and 600 processors. The company’s competitors are not likely to curtail its ability to expand in the sector. Qualcomm’s increased sales revenue, additional innovation, and a restructuring of the company’s priorities should help it maintain its dominance.

Worldwide adoption of smartphones

The worldwide adoption of smartphones has enabled Qualcomm to deliver strong quarterly revenue results. Recently, the company announced revenue of $6.12 billion, up 24% year-over-year and 2% sequentially.

While the worldwide adoption of smartphones may increase sales in the short term, if the industry’s growth slows down, Qualcomm will have to either slow down its expansion or reduce dividends. This could provide a way for rivals to coax customers from the company, as they are looking for a sign of weakness. But since Qualcomm has taken its time to diversify its operations, the company will maintain a balance between its smartphone and other businesses.

Chipset division growth

During its second quarter earnings report, Qualcomm reported a 17% growth year-over-year in chipset shipments. The company also reported a 29% growth year-over-year in device sales. Compared to peers Broadcom (NASDAQ: BCOM), which reported a product revenue of $1.9 billion and Texas Instruments (NASDAQ: TXN), which reported an 8% revenue decrease in the first quarter, Qualcomm is right on par to remain competitive.

Along with introducing the Snapdragon processors, Qualcomm has increased the pace of its licensing agreements and developed an extensive chipset roadmap. In comparison, Broadcom has expanded its portfolio to state-of-the-art system-on-a-chip and embedded solutions. Qualcomm has also continued to invest heavily in research and development.

Competitors

Investors should pay close attention to the communication equipment sector. Qualcomm, Broadcom, and Texas Instruments develop processors and other business solutions, including data networking and storage.

Owing to the favorable trends, namely the growing dominance of smartphones and tablets, Broadcom’s stock has been on the high-end of its 52-week range. Qualcomm holds the competitive edge in cellular baseband chips for mobile phones, but Broadcom responded by shifting to smartphones and the 4G standard to be competitive. To hurt Qualcomm over the Snapdragon, Broadcom is licensing ARM’s ARMv7 and ARMv8 architecture to make a chip that integrates Broadcom's 4G LTE modems. This enables Broadcom to effectively compete in the LTE market with Qualcomm.

The second notable Qualcomm competitor is Texas Instruments. Its OMAP driver competes with Qualcomm's Snapdragon. It lost customers such as Motorola to Qualcomm, but it has bounced back with the OMAP 4470 processor. Companies such as BlackBerry are using it for its capacity for high performance. Some analysts are eying the $35.71 per share mark for 2014. The company has recorded a slight loss over the last month when compared to Qualcomm. It has a $3.40 per share cash balance and debt of $5.68 billion, compared with Qualcomm's cash balance of $7.80 per share. Qualcomm, like Texas Instruments has seen a 2% pullback over the last one month. With a gross margin of 61.27%, Qualcomm is more attractive than Texas Instruments (43,63% gross margin). Texas Instruments also has a less impressive cash balance and PE at $3.48 per share and 22.29.

Summary

Relying on its dominant position as a supplier of chips for tablets and smartphones, Qualcomm has expanded its business services despite the rivalry of Chinese vendors. Its fourth quarter shipment of 3G/4G devices was about 233 to 237 million units, at an estimated average selling price of about $224 to $230 per unit. The stock has remained stable in the past few months. It is trading around the low end of its 52-week range at around $61. So this might be the right time to buy the stock.


Mark Girland has no position in any stocks mentioned. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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