QUALCOMM, Inc. (QCOM): Where Do You Go From Up?

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If there is a chip company out there that could rightly be called the “Intel Corporation (NASDAQ:INTC) of Mobile,” it would be QUALCOMM, Inc. (NASDAQ:QCOM). For those unfamiliar with the story, Qualcomm is the leading merchant vendor of mobile applications processors and cellular platforms, and supplies chips to the likes of Apple Inc. (NASDAQ:AAPL) and SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF). Furthermore, Qualcomm owns a veritable war chest of patents on key wireless standards, which has allowed it to generate a very healthy royalty stream that has grown commensurate with the continued growth in mobile devices. However, at current levels, risk is much more heavily weighted to the downside.

Where do you go from up?
According to Strategy Analytics, QUALCOMM, Inc. (NASDAQ:QCOM) owned no less than a 43% share of the smartphone applications processor space in the first half of the year. Of the four remaining vendors in the top five, one (ST-Ericsson) will be exiting the business, and two (SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) and Apple Inc. (NASDAQ:AAPL)) serve captive audiences (on their their own devices) and aren’t necessarily competing with Qualcomm. In short, Qualcomm completely owns the high-end smartphone apps processor market and competes briskly in the low-end market.

QUALCOMM, Inc. (NASDAQ:QCOM)However, that’s the fundamental problem. While I in no way wish to downplay QUALCOMM, Inc. (NASDAQ:QCOM)’s supreme execution with its product line, what has held back the majority of its competition has been a lack of LTE cellular connectivity. Qualcomm had a head start in developing and deploying an LTE baseband and RF solution, and as a result, any chip vendor without a credible LTE platform — no matter how competitive it could make an apps processor — was locked out of the game.

Everybody’s doing the LTE dance
While 2012 and 2013 were QUALCOMM, Inc. (NASDAQ:QCOM)-only on the LTE side of things, the 2014 landscape looks much more competitive. Broadcom Corporation (NASDAQ:BRCM) just picked up a choice set of LTE and LTE-Advanced assets in a fire sale. Intel Corporation (NASDAQ:INTC) is finally shipping a multimode voice and data LTE solution (the XMM 7160) and is on track to bring a next generation platform (XMM 7260) with carrier aggregation and Cat6 (300 Mbps) support during the first half of 2014. Additionally, NVIDIA Corporation (NASDAQ:NVDA) is in final stages of having its own integrated LTE solution validated on AT&T Inc. (NYSE:T)‘s network.

So, the problem for QUALCOMM, Inc. (NASDAQ:QCOM) is simple: With a new breed of competition, it will either see margin pressure or it will simply lose market share. In either case, this is a lose-lose for both sentiment and revenue/earnings growth (which has been fueled by the company’s booming semiconductor business).

What happens when Samsung gets its act together?
Another major concern is that QUALCOMM, Inc. (NASDAQ:QCOM) has significant exposure to SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF) on the semiconductor side of things. That is, many of Samsung’s marquee designs, such as the LTE versions of the Galaxy S4 and Galaxy Note, utilize Qualcomm modems and apps processors. If or when Samsung gets its apps processor and in-house modem efforts in order (Silicon Motion Technology Corp. (ADR) (NASDAQ:SIMO), Samsung’s RF chip supplier, has indicated that this is Samsung’s plan), Qualcomm loses a non-trivial amount of business.

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