Did Qualcomm Shrink its 28-Nanometer Problems to Zero?
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mobile chip maker Qualcomm (NASDAQ: QCOM) is up to its ears in orders for its LTE enabled 28-nanometer-based Snapdragon S4 processor. Now Qualcomm, being a fabless semiconductor company means that all they do is design the chips and then outsource the job of manufacturing them to a third party also known as a foundry partner. Unfortunately, Qualcomm’s foundry partner, Taiwan Semiconductor Manufacturing Corporation is having a tough time churning out 28-nanometer based chips.
So, as one of life’s many little ironies, Qualcomm has approached rival Samsung to help make up for the shortfall. This comes close on the heels of Qualcomm’s deal with chip maker, United Microelectronics (NYSE: UMC) to meet approximately 20% to 30% of its chip needs.
So is this deal beneficial?
Firstly, for Samsung this would translate into additional business which should come in handy if the company’s Exynos chips fail to garner enough demand in the US. And since Samsung has invested billions into its manufacturing facilities, serving as a foundry partner should in part justify all those huge costs.
On the other hand for Qualcomm, outsourcing orders to external suppliers such as Samsung, can increase operating expenses. So margins might not be as high as it would have been with just TSMC in the picture. But I wouldn’t worry about that...
We need more chips!!!
The coming months will see the release of a large quantity of smartphone and tablet devices, notably Apple’s (NASDAQ: AAPL) next generation iPhone, rumored to use Qualcomm’s multipurpose Gobi chipset.
Microsoft’s (NASDAQ: MSFT) upcoming Windows RT operating system, designed to run on ARM (NASDAQ: ARMH) based hardware would also be a driving force for chip demand. Moreover, with ARM based processors appearing on notebooks, the PC market can also be another growing area of demand for Qualcomm’s Snapdragon processors.
So, as you might have guessed by now, Qualcomm’s deal with Samsung and United Microelectronics is essential and also a lot more desirable than losing customers to rivals such as NVIDIA, Broadcom or even the Godzilla of chipmakers, Intel. But while Qualcomm might be compelled to take such steps for now, one shouldn't ignore the company's underlying strengths.
A Well Built Balance Sheet
Qualcomm’s balance sheet clocked total cash and short term investments at more than $15 billion with just over $1 billion in debt as of the quarter ending 25th March this year. I’d say that the company is well covered for any unforeseen problems. If necessary, Qualcomm can even afford to construct its own chip manufacturing facilities and doesn't need to care two hoots about the likes of TSMC.
The Bottom line
Qualcomm recently declared a quarterly cash dividend of $0.25 per share. While the dividend yield may not be too great, the company’s prospects certainly look bright due to the sheer demand for its processor chips.
So did Qualcomm shrink its 28-nanometer problems down to zero? Well, in the near term, the company might witness some weakness due to supply shortages and increased expenditure to secure more chip supplies. But for the long haul, I'd say that the company should solve its problems successfully.
I’m as bullish as ever on QCOM.
kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.