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



Can Qualcomm Avoid Broadcom’s Drop?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Broadcom (UNKNOWN: BRCM.DL  ) reported weakness in its mobile and wireless business going into its fourth quarter. The company attributed this weakness to a slowdown in the high end of the smartphone space, where its connectivity combo chips have dominant share. This may lead some investors to believe that explanation, since Qualcomm (NASDAQ: QCOM  ) is highly levered to the high end smartphone space (its Snapdragon chips are found in nearly every high-end smartphone sold today). While some caution is warranted, things may not be as bad for Qualcomm as they were for Broadcom in its own quarterly report on Nov. 6.

Qualcomm's business is different
When it comes to smartphones, Broadcom supplies connectivity combo chips (that is, chips that combine Wi-Fi, Bluetooth, NFC, etc.). In other markets, particularly in China, the company also sells lower-end applications processors combined with 3G modems (for example, the firm's BCM23550 combines a quad core 1.2GHz Cortex A7 with an HSDPA modem). The company's eventual goal is to provide both stand-alone LTE modems/RF/PMIC at the high end, and then in the mid-range and the low-end offer integrated apps processor and LTE modem.

Qualcomm, on the other hand, supplies apps processors and modem/RF/PMIC across the entire stack. For example, nearly every high-end smartphone today comes packed with a Qualcomm Snapdragon processor (which either integrates the cellular baseband or is a stand-alone processor), cellular solution (either stand-alone modems or integrated), and power management. While Qualcomm faces competition in the low end from the likes of MediaTek and Spreadtrum (UNKNOWN: SPRD.DL  ) , it remains unopposed at the high end.

But, that's just the hardware story; most of Qualcomm's profitability doesn't come from the hardware that it sells, but rather from licensing and recurring royalty streams stemming from its patents on wireless/cellular standards and technologies. For example, Qualcomm gets a cut of the selling price of nearly every 3G and 4G-capable device sold today. This means that Qualcomm profits from sales of phones that might not even have a single Qualcomm-designed chip.

Not immune to high end smartphone slowdown
With that said, Qualcomm isn't immune to the slowdown in high-end smartphone sales. If there is a mix shift downward, then Qualcomm clearly sees a slowdown in the growth of its royalty stream since this royalty is based on average selling price. Further, on the hardware side of things, Qualcomm's high-end parts are quite differentiated and face very little competition, so these can command healthy pricing and margin premiums. At the low end, however, there's not much to differentiate Qualcomm's parts from those manufactured by MediaTek, Spreadtrum, and (a recent entrant in the low end LTE/apps processor space) Marvell. These largely use off-the-shelf ARM Cortex A7 cores, although they tend to differ a bit on graphics.

Strength still likely to continue
A year ago, Qualcomm's presence in tablets was largely nonexistent. Today, however, its highest-end Snapdragon 600 and 800 chips are found in important, high-end non-Apple designs including the Nexus 7, Kindle Fire HDX, and the Galaxy Note 3. Even if the high-end smartphone market is slowing, Qualcomm now has a presence in a fundamentally new market and, at the same time, continues a strong showing in the low end of the smartphone chip space and likely continues to gain share against its peers there.

Foolish bottom line
While Qualcomm becomes more interesting on a pullback, it is difficult to imagine that the company will disappoint in the same fashion that Broadcom did, particularly as it has exposure to both the high end as well as the bourgeoning low end (even if it brings down the blended gross margin profile). While longer term concerns of competitive threats loom (Intel and Broadcom LTE solutions in 2014), Qualcomm's business still remains robust and shares aren't particularly expensive at just under 14 times next year's non-GAAP earnings.

Qualcomm and Broadcom investors should know this company
The amount of data we store every year is growing by a mind-boggling 60% annually! To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.


Read/Post Comments (0) | Recommend This Article (1)

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: 2694538, ~/Articles/ArticleHandler.aspx, 9/25/2016 12:18:38 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 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

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

12/31/1969 7:00 PM
BRCM.DL $0.00 Down +0.00 +0.00%
Broadcom CAPS Rating: ****
QCOM $62.75 Down -0.77 -1.21%
Qualcomm CAPS Rating: ****