Snapdragon to Attention for Qualcomm

By Peter Pham - July 20, 2012 | Tickers: ARMH, GOOG, MSFT, NVDA, QCOM | 0 Comments

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Qualcomm’s (NASDAQ: QCOM) 3^rdquarter FY 2012 results were unspectacular in that they hit analysts’ estimates for revenue and income.  But there is nothing ordinary about their performance, which continues to be exemplary.  Top line revenue rose year over year by 28% and income rose 16%.  Volume was up, as was the average selling price for their mobile stable modem chipsets, which resulted in a 31% increase in revenue from device sales. 

If that’s unspectacular, I’d hate to see a blowout.

The sad part for their shareholders is that if not for continued troubles at TMSC over their 28 nm wafering process Qualcomm’s results and future guidance would be better and their lead over the competition that much bigger.  ARM-based (NASDAQ: ARMH) mobile SoC competitor nVidia (NASDAQ: NVDA) gained a number of crucial design wins in the 2^nd quarter, one had to believe, because of these supply troubles.  nVidia’s low-cost Kai platform, based on an under-clocked Tegra 3 SoC, is what powers the new Google (NASDAQ: GOOG) Nexus 7” tablet as well as the first iteration of Microsoft’s (NASDAQ: MSFT) Surface Windows RT tablet due in October with the release of Windows 8 OS. 

Qualcomm’s Snapdragon S4 line of dual-core SoCs sport not only a far smaller die size (28nm vs. 40nm) than the Tegra but an integrated LTE modem and equivalent/superior performance in just about every category except 3-D gaming.  It is arguable under Google’s Android, even with version 4.0 and 4.1, that the OS gains much from the presence of multiple cores at this point.  So, the quad-core Tegra 3 is overkill, but nVidia’s price is relatively cheap at around $25.

It was noted during their earnings presentation that the Snapdragon has literally hundreds of design wins in the rapidly expanding smartphone market and a few tablets as well, mostly lined up for the 4^th quarter, and Qualcomm has added both UMC and Samsung to their supply chain to ensure that demand is met.  This will raise their COGS and squeeze margins for the next quarter or two, but it’s a necessary move to supply the market and head off any more momentum gained by nVidia during this.

The market for smartphones, from top to bottom, is growing at an insane rate.  Gartner estimated a 45% growth rate in the first quarter of 2012, with China selling more than 33 million during that time, a 160% rise over 2011.  This is where Qualcomm’s low cost, full integration, and ability to ship hundreds of millions of single core Snapdragons will work to their advantage. The coming quarters will see more than double the number of devices running on Qualcomm Snapdragons to nearly 1,000 models, including 175 S4’s, up from 15 currently.

Simply put this is a leader in the industry and looks like it has a huge time advantage on their nearest competitor.  The quad-core S4’s (4 Krait cores, a hybrid A9/A15 design) are in sampling now and should be in shipping products by Q1 2013.  By then nVidia is due to have their quad-A15-core Tegra 4 ready, but the latest news on that is from April.  nVidia will likely have to make some formal announcement of their roadmap beyond the Tegra 3 soon or else 2013’s best devices will all be running Snapdragons. 

With the near-term in the markets very uncertain due to the on-going drama in Europe and the very mixed signals coming from the U.S., it would seem that Qualcomm’s lowered guidance for Q4 is only rational.  This is a stock that may not move much until the 4^th quarter due to these headwinds, especially trading at a multiple of 20.  But they are uniquely positioned to prosper with the changes coming in the computing industry as a whole, while management is committed to paying shareholders through a mix of stock re-purchases and rising dividends. 

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