Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Qualcomm Runs Into Tech's Law of Gravity

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

There's a definite lesson in Qualcomm's (Nasdaq: QCOM  ) weak guidance. No matter how great a tech company's long-term growth prospects look, investors shouldn't forget that hardware gets cheaper over time, and that consumers and businesses will insist on taking advantage of those lower costs. Like gravity, it's pretty much inevitable.

On a long-term scale, PCs are probably the best example of this trend. Average selling prices for desktops and notebooks are a fraction of what they were 10 to 15 years ago, and the likes of Intel and AMD have to deal with the consequences. Cell phones have also seen long-term price declines, though in recent years, a combination of growing demand for more feature-rich phones and the widespread adoption of 3G phones in developed nations has kept a lid on the price drops. But Qualcomm's numbers suggest that lid just got blown off.

Mainstream smartphones get cheaper
Thanks to price declines in smartphones and other advanced devices, and weaker demand in Europe and Japan relative to many developing markets (where phone prices tend to be lower), Qualcomm estimated that in the last quarter, the average selling price (ASP) on CDMA phones for which it received royalties fell to $184. That's down from $212 in the year-ago period, and well below the $198 that the company was expecting for the quarter. In addition, Qualcomm dropped its expected ASP for this fiscal year (ends in September) from $189 to $181. Unsurprisingly, all of this led to a drop in the company's revenue guidance range for the year.

If you're just paying attention to media hype, then this ASP drop might be hard to fathom. After all, marquee smartphones such as Apple's iPhone, Motorola's (NYSE: MOT  ) Droid, Nokia's (NYSE: NOK  ) N97, and Google's (Nasdaq: GOOG  ) Nexus One can't get enough ink, and all of these devices have unsubsidized price tags well above $200. But look down the smartphone totem pole a little, and you find products such as Research In Motion's (Nasdaq: RIMM  ) BlackBerry Curve and Pearl lines; Nokia's 6000-series models; and Palm's (Nasdaq: PALM  ) Pixi. These devices, which appeal to more cost-sensitive consumers, tend to rely a lot more on mature components and technologies, and the result is a steady drop in selling prices. Qualcomm is definitely feeling the effects.

Bad news factored in
Nonetheless, with a 15% drop today, I think most of this bad news is now factored into Qualcomm's shares. While the Curves and Pixis of the world will continue to pressure smartphone ASPs, growing consumer interest in advanced technologies such as OLED displays, capacitive touchscreens, and high-performance processors such as Qualcomm's Snapdragon line will limit the amount of damage done.

And Qualcomm does have some other things going for it. The Snapdragon, which is used in the Nexus One and several other devices, could be a smash hit. Also, a win in's (Nasdaq: AMZN  ) Kindle line highlights the company's growth potential in the embedded-device market.

With $18.9 billion in net cash and a reasonable valuation on an enterprise value/earnings basis, there's still a lot to like with Qualcomm. Even if the company remains far from immune to tech's law of pricing gravity.

Fool contributor Eric Jhonsa has no position in any of the company's mentioned. Intel and Nokia are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Apple and are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a buy calls position on Intel. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1097023, ~/Articles/ArticleHandler.aspx, 10/26/2016 12:32:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 3 hours ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 4:00 PM
QCOM $67.71 Down -0.35 -0.51%
Qualcomm CAPS Rating: ****
AMZN $835.18 Down -2.91 -0.35% CAPS Rating: ****
BBRY $7.27 Down -0.08 -1.09%
BlackBerry CAPS Rating: *
GOOGL $828.55 Down -7.19 -0.86%
Alphabet (A shares… CAPS Rating: *****
MSI $74.16 Down -0.33 -0.44%
Motorola Solutions CAPS Rating: ***
NOK $4.97 Down +0.00 +0.00%
Nokia CAPS Rating: **
PALM.DL2 $5.69 Down +0.00 +0.00%
Palm CAPS Rating: *