Qualcomm (QCOM, Financial) surprised everyone when it declared its intent to enter the wearable gadgets market. It launched the first iteration of its smartwatch, called "Toq," in the fourth quarter. This is designed to serve as a second display to your smartphone. This could be a "smart" move if we look at the woes of Intel (INTC, Financial) due to a shrinking PC market.
The year 2014 is already being touted as a breakthrough year for smartwatches and as already mentioned above; Qualcomm has declared that it will be launching its own smart watch called Toq in the fourth quarter of 2013. The latest research from Canalys projects that smartwatches "are set to explode by the end of 2014”³ when vendors will ship more than 5 million units, a 900% increase from the number of units Canalys expects vendors to ship this year.
Investors were concerned that Qualcomm is currently too deeply entrenched in the mobile computing space, just like Intel was tied up with chips and processors for the PC market and was too late to diversify. Perhaps, Qualcomm may have many such "smart surprises" in store for the future that would please investors. But, before looking ahead, let's take a look at its current business which is doing well.
Performance in recent past
Qualcomm has a strong presence in the mobile computing space and was an early mover in the 4G LTE connectivity field. The company recently released its Q3 2014 results and it has improved considerably on revenue. It reported $6.81 billion, a gain of 9% year over year and 7% on sequential quarter. The net income increased by robust 42% year over year, to record $2.24 billion.
The journey ahead
Qualcomm's Snapdragon 800 quad core chipset supports 3G/4G LTE modem with ultra HD graphics. It also offers a better battery life and faster clock speeds of up to 2.2 GHz. This makes it an obvious choice for high-end smartphones. The company will supply Snapdragon 800 processors to Samsung for Galaxy S4 LTE-A phones also.
The company is strongly integrated into Apple's iPhone and iPad products as well as many Android-based devices, including the best-selling products from Samsung, Sony and HTC to name a few. It also has displaced Nvidia's Tegra line of chips in the second iteration of the Nexus 7 tablet from Google. It is evident that Qualcomm is positioned for growth even under different competitive and market scenarios.
Qualcomm's Snapdragon 800 quad core processors should also gain traction in emerging markets as deployment of 4G LTE gains momentum in China and India. In India, Qualcomm is looking to gain through its partnership with Bharti Airtel, the largest telecom operator in India. India has a huge telecom market with only 2% penetration of broadband service.
According to Gartner, the penetration of smartphones in emerging markets is still only 10% of the total population, and global smartphone demand is expected to grow at an annual compounded rate of 20% from 2012 to 2017. As for tablets, Gartner is expecting a huge annual increase of 67.9% in 2013 as tablets continue to gain market share at the expense of the declining PC market.
Competitors
In the wireless segment, Broadcom (BRCM, Financial) competes with Qualcomm. Almost 50% of Broadcom's revenue comes from this segment. But Broadcom has already lost a good number of low-cost smartphone sockets to Qualcomm. Instead of Broadcom's products, Qualcomm's connectivity chips were chosen for the Motorola Moto X and the Samsung Galaxy S IV Mini. In addition, Broadcom's main cash cow, 3G solutions, will be replaced in the next few years by 4G LTE solutions where Qualcomm already has a lead.
Even after disappointing earnings, most analysts still remain bullish on Broadcom, primarily because the stock is undervalued. However, one needs to ponder that in case the stock is really undervalued, why has negative sentiment persisted for so long?
Broadcom's negative market sentiment could increase further if Apple decides to use Qualcomm's connectivity chips for both the iPhone 5S and the 5C model that is aimed at emerging markets. Qualcomm's new RF360 Front End Solution chip could allow the iPhone to run on all 2G, 3G and 4G LTE networks and thereby allow Apple to save on costs which would become critical for the mid-range/low-end market segment.
Conclusion
When it comes to mobile, Qualcomm is way ahead of its peers. The company commands a lion's share of the global baseband market and it is looking to extend its expertise further by branching into the next hot category — smartwatches. Investors looking for an ultimate play in mobile should consider Qualcomm for their portfolios.
