Qualcomm: Invest in the Shovel Manufacturers, Not the Gold Diggers
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The old adage “If you want to make money during a gold rush, do not dig gold and compete with many; instead, sell shovels to those who dig” holds very true for Qualcomm (NASDAQ: QCOM). As it happens, Qualcomm is the player that is selling shovels (i.e. the Snapdragon chipset) to the gold diggers in the smartphone market, like Apple (NASDAQ: AAPL) iPhone 5, Samsung Galaxy III and Microsoft (NASDAQ: MSFT) Windows RT. Although Qualcomm is facing demand pressures with low supply of Snapdragon chipset, we believe that the supply would be corrected by 4Q12 and therefore rate QCOM as a buy.
Snapdragon chipset MSM8960 (baseband processor, RF transceiver, power control chip, and connectivity chip) is the core of many recently introduced smartphones. Qualcomm management during the earnings call disclosed that the demand for its latest Snapdragon chipset was exceeding its ability to supply. The MSM8960 is processed on 28 nm fab lines by Taiwan Semiconductor (NYSE: TSM), and with the low supply of these devices in the market, the company is facing problems filling the demand. The company highlighted in the Q2 earnings that it has more than 150 design wins using its S4 series of Snapdragon chipsets. Although Taiwan Semi expects strong demand for 28 nm to be somewhat resolved by December with some constraints lasting through January, we believe that Qualcomm is looking for substitute capacity, most likely with Samsung, Globalfoundries and United Microelectronics (NYSE: UMC), to balance supply/demand before the Microsoft Windows RT launch. While we understand that the 28 nm capacity constraints will prevent Qualcomm from fully monetizing the increasing demand during 3Q12, we believe that the situation would improve in 4Q12 with the addition of new capacities.
Qualcomm’s licensing business (QTL) is another area which needs to be closely watched. Qualcomm posted the second-best-ever QTL ASP’s of $229 in FQ3, only $2 shy of the $231 record reached in F3Q05. We believe that the technological innovations in the smartphone/ tablet space have many implications for QTL. We believe high-end smartphones drove most of the upside, and the ramp of the Samsung Galaxy Note was a key driver of the QTL ASP lift in FQ3. We believe that consumers are largely favoring large screen devices due to easy usage/high media functionality. The OEM manufacturers are complying with their demands as we continue to see growing screen sizes. (Samsung Galaxy S- 4.0”, Samsung Galaxy SII- 4.3”, Samsung Galaxy SIII- 4.8”) .We believe that the display size inflation could provide further upside to the 3G/4G device ASP’s as OEM’s shift towards large screen smartphones.
To conclude, we believe that QCOM represents one of the best ways to play the 3G growth trend as its business model has not yet fully realized its potential. Qualcomm seeks to benefit with the growing Smartphone and tablet market as it essentially makes money from almost every single advanced device sold (from QCT and/or QTL). As we believe that investors will continue to benefit from a highly profitable licensing stream and share gains in their chipset business, we rate it as a buy.
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