No Qualms About Qualcomm
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The story for Qualcomm (NASDAQ: QCOM) should be pretty well known to investors at this point. The company is hitting on all cylinders, positioned well at all levels of the mobile computing revolution. Owners of an extensive list of CDMA patents as well as many 4G/LTE patents, Qualcomm gets a 3-5% royalty on practically every mobile device sold. Tearing down an iPhone or tablet you will see at a minimum a Qualcomm modem. Apple’s (NASDAQ: AAPL) upcoming iPhone 5 will likely use the A5X processor which is built by Samsung using a separate Qualcomm baseband processor.
But the trend in mobile computing is for smaller, faster and a longer battery life and in that battle it looks like Qualcomm’s new dual-core Snapdragon processors have a huge advantage over their ARM-based (NASDAQ: ARMH) competitors. The Snapdragons use Qualcomm’s Krait A15 based core which individually up to 40% faster than the A9 cores used in both Apple’s A5 and A5x as well as Nvidia’s (NASDAQ: NVDA) Tegra processors. These are integrated processors which combine both the application CPU with the baseband modem and do it all on a 28nm wafer as opposed to the 40 nm wafer used by Nvidia’s Tegra.
The importance of 28 nm vs. 40 nm cannot be overstated in the mobile computing space. Smaller die size translates directly into lower power consumption giving the Snapdragon a huge advantage in terms of battery life. This is a the trifecta for Qualcomm at this point in the mobile development cycle out-competing on price, performance and power consumption. At their Computex presentation this week, Qualcomm laid out how the new Snapdragon will come in 4 different flavors to cover devices from the entry level smartphone to the connected TV.
The buzz is building around Windows on ARM or WoA with both Qualcomm and Asustek showing off devices that will be available shortly. According to Digitimes the first WoA tablet will be a Nvidia Tegra 3 quad core processor likely aimed at the tinkerer/gamer set where the Tegra’s four A9 cores shine over Qualcomm’s dual-core A15’s but at the lower end of the market, especially the 7 inch general purpose tablet market WoA should be a huge hit with small business at an attractive price point.
Qualcomm began this game of shrinking the PC into a phone along with Microsoft and Apple a decade ago, as a technology leader expenditures into R&D are crucial to staying ahead of the game. Looking back over the past four years Qualcomm has maintained an R&D budget of at least 20% of top line revenue even as that has expanded by 34%; spending nearly $3 billion in developing new technology.
Qualcomm’s license with ARM is an architecture one, which allows them the flexibility to design flavors of processors that are device specific. There is not one size fits all in their approach to their Snapdragon architecture. This meshes perfectly with what is at the heart of Apple’s mobile computing revolution; purpose-built devices that deliver a seamless user experience over the illusion of choice created by generic hardware onto which is grafted the user interface.
Microsoft is embracing this with Windows 8 and its ARM-based variant Windows RT. The task for Microsoft is maintaining that user experience across the huge swath of hardware that will attempt to run their new interface. Microsoft is definitely running Apple’s play book with Windows Phone, tying hardware manufacturers’ hands to specific design constraints to speed up the app development process.
In the near term there is such a huge demand for Qualcomm’s 28nm solutions that it has created a supply constraint that will advantage Apple because of their leverage in the supply chain currently and will likely not damage the roll out of the iPhone 5 in October. The bigger question will be who is affected by this shortage and how Qualcomm responds to the inability of TMSC to supply the current demand. Qualcomm and others are reportedly looking to Samsung to alleviate this supply constraint who, in turn, is looking to expand its foundry operations beyond supplying Apple.
This is likely why they guided third quarter earnings and revenue projections down slightly. Trading at a multiple of 20 with a 1.7% yield, which has steadily risen over the past five years, it is hard to have any reservations about Qualcomm since they are selling some of the best products into the hottest sectors with their technology fueling everyone’s attempt at dominance. In a way no matter who loses, Qualcomm wins.
Their biggest threat is the rise of either Intel or AMD into the tablet computing space. It is something that Intel wants, but there is nothing to suggest that momentum is shifting away from Qualcomm. So little is known about what Apple’s plans are on the A6 that any discussion is pure speculation. CDMA market share is waning but their core product line now has integrated LTE and Qualcomm is busy signing deals to roll out 3G and 4G in India and other emerging markets.
In the short term the uncertainty in the markets created by the crisis in Europe has everyone sitting on their hands on fears of a Euro-zone melt down and potential breakup. When that fear clears the air Qualcomm should be high on any investor’s shopping list.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Qualcomm. Motley Fool newsletter services recommend Apple and NVIDIA. 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.