With the recent announcement that Qualcomm (NASDAQ: QCOM ) will be investing with French telecommunications equipment company Alcatel-Lucent (NYSE: ALU ) in a new joint venture, investors on both sides seemed to approve of the idea, with Qualcomm and Alcatel shares making gains after the announcement. But Alcatel's current financial situation is less than rosy, so is the partnership really a good move for Qualcomm?
A big bet on smaller tech
Though neither company has disclosed how much they're putting up individually, the two companies have agreed to bring together $132 million in research and development funds to work on small-cell technology. Small-cell tech increases wireless data capabilities in high-traffic areas like shopping malls, college campuses, or heavily populated city streets.
Alcatel will bring its lightRadio small-cell technology to the table, while Qualcomm will pitch in its FSM9900 small-cell chipsets. Small-cell technology puts 3G, 4G and Wi-Fi capable networks into a shoebox-sized device, allowing increased signal strength and data capacity where large towers aren't feasible.
As mobile traffic increases, small cells are being used by more wireless carriers, including the No. 2 largest carrier, AT&T (NYSE: T ) . The company began testing small cells within its network in 2012 and plans to deploy more than 40,000 small-cell stations by 2015. Just last month, AT&T won an award for its contributions to the small-cell industry and the company says it's rolling out the broadest small-cell initiative of any carrier.
AT&T's small-cell program shows a broader move to the technology, and estimates for the small-cell industry are projected to be around $2 billion by 2016.
For Alcatel, Qualcomm's investment couldn't have come at a better time. The company's been losing money hand over fist recently, and just reported a year-over-year net loss of $1.7 billion in the second quarter. Alcatel's in the process of restructuring its business and looking for strong partners to move the company forward, and Qualcomm's leadership in the industry can definitely help it with that.
For Qualcomm, the benefit comes in moving further into the small cell industry. Ian Ing, an analyst at Lazard, thinks the Alcatel-Qualcomm partnership could bring anywhere from $0.08 to $0.29 per share for Qualcomm investors, at peak run-rate. But Ing believes Qualcomm will benefit more from licensing the small-cell base stations than from the company producing more chipsets. Either way, it seems the company is in a position to gain.
Qualcomm's stake in the joint venture is estimated to be under 5% -- meaning that there shouldn't be too much investor concern that Qualcomm could be hurt by Alcatel's current poor performance. Going forward, investors should keep an eye on which telecommunications companies Qualcomm and Alcatel provide small cells for and what magnitude the deals are. Qualcomm investors should also be looking for which new partnerships Alcatel makes and how it might help the small-cell partnership. I wouldn't make a bet on Qualcomm simply based on the new partnership, but when the small-cell business is added to Qualcomm's chipset business and royalty revenues, it shows the company is focused on remaining a strong contender in the growing mobile industry.
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