Qualcomm Emerging as Intel’s Competition
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world has been moving towards smartphones and tablets and one of the casualties of this has been personal computers. This shift became more apparent recently when the market cap of the world’s largest mobile semiconductor manufacturer Qualcomm (NASDAQ: QCOM) touched $105 billion as the company became bigger than Intel (NASDAQ: INTC), whose bread and butter is attached to PC sales, with a market cap of $103.3 billion. Qualcomm, not surprisingly, has issued a confident future outlook for the current quarter which caused its shares to jump by more than 7% in the early hours of trading on 8th November.
The company is expecting to earn revenues of $5.6-$6.1 billion which was more than the market’s expectation of ~$5.3 billion. This will translate into EPS of $0.90 to $0.98 which is considerably more than its most recent $0.72 per share for its quarter ending September 30. For its fiscal year 2013, Qualcomm is aiming for $23-$24 billion in revenues, which is $1.3 billion more than analysts’ expectations even at the low end of the scale. Its forecast was bolstered by increasing demand for smartphones in both emerging as well as developed markets.
In its most recent quarterly filings, Qualcomm reported an 18% year-on-year increase in revenues to $4.87 billion and a 20% year-on-year increase in quarterly income to $1.27 billion. Most of the revenues have come from sale of baseband chips to smartphone vendors such as Samsung, Apple (NASDAQ: AAPL) and HTC. Rival mobile SoC vendor Nvidia (NASDAQ: NVDA) also posted strong third quarterly results in which the company earned a record revenue of $1.20 billion, a 13% increase year-over-year, while its income increased by 17.3% to $209 million on the back of strong tablet demand and two major design wins for its Tegra 3 low-power reference platform, code-named Kai, which powered the initial run of the Google Nexus 7 as well as Microsoft’s Surface RT tablets. Initial sales for Surface appear very strong along with Google’s nexus line so things look very bright for Nvidia especially on the eve of the Cortex A-15 based Tegra 4’s release.
Qualcomm, as well, looks good in the long term as well as there are incredible opportunities for growth for smartphones almost everywhere in the world and their Snapdragon S4 line of SoC’s currently solve so many engineering problems up and down the current smartphone and tablet value chain. The smartphone penetration in some of the leading global economies; such as China, Germany and Italy, is still equal to or lower than 33%. Overall, the global smartphone market will grow by 35.4% in 2013.
However, Qualcomm as good as Qualcomm’s results have been it is hard to ignore how much they were affected by the troubles Taiwan Semiconductor Manufacturing Company (NYSE: TSM) had in transitioning to the 28nm process. Snapdragon S4’s had to be rolled out more slowly than Qualcomm wanted and that likely shifted Google and Microsoft to go with Nvidia in their earliest generation products listed above. Qualcomm indicated earlier this year that it was looking for other suppliers as well. But recently, the senior executives of both Qualcomm and Nvidia have expressed confidence in TSM’s ability to increase its output of 28nm chips following the increasing demand. TSM’s has upgraded its production lines which saw its quarterly 28nm production output increase by 105% sequentially. So, the 28nm bottleneck has been removed from the supply chain and the challenge now will be for Qualcomm to continue to press its advantage before the slew of dual and quad-core A-15s hit the market. The China Mobile version of the Nokia Lumia 920 (the 920T) points towards the future as it uses a newer version of the dual-core S4 mated with the Adreno 320 GPU, putting Qualcomm’s best GPU with its mid-range SoC which should blunt some of Nvidia’s natural advantage in graphics processing.
**Trailing Twelve Months (as of Sep 29, 2012) ***Trailing Twelve Months (as of Oct 28, 2012)
Qualcomm stock has easily outperformed both Intel and Nvidia throughout CY2012 and has given an even better future guidance and has been more profitable. However, it has a relatively lower yield and ROE, due to being priced at a higher multiple. Investors clearly see Qualcomm as a growth stock at this point. And well they should. At this point, with AMD’s implosion and complete mismanagement of what should have been superior asymmetric computing technology to Intel’s, Qualcomm is emerging as the chief rival to Intel in the future of computing, moreso than Apple or Samsung as Qualcomm’s baseband integration solutions are far more advanced even if their Adreno graphics core is still a laggard. That gap with the 320 is closing compared to the PowerVR solutions used by their competition.
The big picture is what moves will be made in this space going forward. Since Qualcomm has proven they can produce a solid GPU and Apple is looking to move away from Intel and source their entire production line internally, it makes sense that there will be a major acquisition at some point in the near future.
I would think that Apple and Samsung both would be looking for a graphics solution to do internal development with. The next 18 months for AMD will be interesting and it is very likely at this point that the company will not survive this latest round of missed launch dates and the war of attrition with Intel has finally ground them out. I would not be shocked if Apple was sniffing around AMD for its Radeon technology to marry to its A6 and 64-bit version now that ARM has released the 64 instruction set and Cortex A-50 series reference cores. AMD has announced they will do this to build microserver SoC’s for their SeaMicro division. At this point there is Nvidia, who does not want to be acquired, AMD and PowerVR. Someone’s going to get bought with the cash lying around this industry. Who will it be?
And while Intel has Haswell on the horizon until they can prove they can produce a mobile chip that competes with ARM-based designs, I remain dubious of their prospects in the medium term.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Intel, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, Intel, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!