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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 Amazon.com'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.