Throughout much of last year, QUALCOMM, Inc. (NASDAQ:QCOM) experienced supply constraints with its 28-nanonmeter chips, resulting in its inability to keep up with demand. Last quarter, these constraints finally became a nonissue and Qualcomm is back to business as usual. As a result, it went ahead and slightly raised full-year guidance last quarter.
A big driver of success during the quarter were Qualcomm’s 3G/LTE chipsets, which have been largely unmatched in terms of the competition, having controlled 86% of the LTE modem market in 2012. In the years ahead, the company will face increased competition from experienced chip makers, which will not only threaten this line of its business but likely put pressure on its profit margins.
The LTE bandits
Broadcom Corporation (NASDAQ:BRCM) is the most recent company to join the LTE bandwagon. Set to be released next year, Broadcom’s LTE solution will have a 35% smaller footprint than rivals, offers speeds of up to 150 megabits per second, and will work with multiple frequency bands to support worldwide use. This chip is intended for the “highest-end” smartphone and tablet market, which to me sounds like Broadcom wants a bigger piece of Apple Inc. (NASDAQ:AAPL)’s business. Both the iPhone 5 and the 4G-enabled iPad utilize Qualcomm LTE chips.
NVIDIA Corporation (NASDAQ:NVDA)’s acquisition of Icera in 2011 allowed it to command a 1% market share in the LTE space last year. Naturally, it intends to grow this market share by developing an integrated chip that combines both the Tegra processor with an LTE modem. The company feels that growing Tegra into a “big business” will take successfully combining these two elements due to the fact that the “vast majority” of the mobile computing market will be focused on integrated chips. To date, NVIDIA has only shipped discrete LTE chips separate from the Tegra 3 processor and the company is expected to have an LTE-integrated Tegra 4 chip available sometime this year.
It won’t be until next year that Intel Corporation (NASDAQ:INTC) really gets going in the LTE market. The company has only begun ramping up its efforts, which so far has amounted to shipping single-mode and LTE basebands to its customers and has yet to ship a combined voice and data solution on the same chip. As far as a full-blown Atom-LTE integration is concerned, investors shouldn’t expect anything out of Chipzilla for a couple of years. The reason I say this is because CEO Paul Otellini said during Intel’s most recent conference call that only “high levels of [Atom-LTE] integration” will happen in 2014.
Yesterday, JPMorgan Chase & Co. (NYSE:JPM) downgraded shares of Qualcomm, citing an expected decline of smartphone growth in 2014, coupled with the fact that the company generated a “windfall” as a result of easing 28-nanonmeter supply constraints. The firm also expects Qualcomm to potentially take a hit on its royalty business, which represented 56% of its operating profits last quarter. The driver behind this decline is that average selling devices for mobile phones are expected to decline, for which Qualcomm is often compensated . Given how smartphones only make up 25% of the worldwide mobile phone population, there is still plenty of opportunity for Qualcomm to make up for an ASP decline with volume.