Why Qualcomm Didn’t Pop on Apple’s China Mobile Deal

When Apple (NASDAQ: AAPL  ) announced that it finally struck a deal with China Mobile, Apple suppliers such as Cirrus Logic (NASDAQ: CRUS  ) and Broadcom (NASDAQ: BRCM  ) popped on the news. However, there was a curious laggard that day: semiconductor powerhouse Qualcomm (NASDAQ: QCOM  ) . For those of you unfamiliar with Qualcomm's relationship with Apple, Qualcomm provides the cellular modem and RF transceiver for all current iPhone models and the cellular versions of the iPad. So, why didn't Qualcomm pop on this news?

How Qualcomm differs from Cirrus and Broadcom
Cirrus Logic derives roughly 80% of its revenue from Apple as it supplies custom-designed audio CODEC chips as well as class-D audio amplifiers. Broadcom, while a more diverse name than Cirrus, does have meaningful exposure to Apple's iPhone and iPad via its connectivity combo chips. The iPhone gaining share over other names is an unequivocal positive for Cirrus and is either neutral or positive for Broadcom, since most, but not all, LTE phones sport Broadcom connectivity. But for Qualcomm, iPhone share gains aren't really that huge of a positive.

Qualcomm isn't your typical Apple supplier
Qualcomm's QCT offers a ton of silicon for smartphone vendors to use. It has applications processors, connectivity combos, RF front end, RF transceivers, cellular basebands, power management ICs, and audio CODECs for many handsets. Indeed, the vast majority of high-end phones from the heavy hitters like Samsung, LG, HTC, and others sport pretty high levels of Qualcomm products. This is great for Qualcomm and this has been one of the reasons that Qualcomm's success has been largely independent of Apple's success over the last few years.

Apple success is neutral to slightly negative
In fact, Apple's success against higher-end Samsung or HTC phones may be viewed as a slight negative for Qualcomm. Why? While Apple uses Qualcomm's cellular baseband and RF transceiver in its iPhones, many of Apple's competitors contain more Qualcomm products. While Apple simply buys a modem, many of these players buy a highly integrated apps processor as well as a modem, and that should fetch more revenue per unit than an iPhone.

On top of that, while Broadcom and Cirrus look to chips for the vast majority of their profits, Qualcomm's bread and butter -- cellular patent/technology licensing -- benefits from all cellular phone sales. If there is a shift in share from higher-end Samsung phones to Apple phones, then from a licensing/royalty standpoint, this isn't exactly a win for Qualcomm. It's just a shift in royalties from one vendor to another.

Foolish bottom line
Qualcomm is happy to sell Apple its LTE modems and RF transceivers, and the royalty stream that Qualcomm generates from the sales of all cellular devices is great. But this broad exposure to the entire smartphone market is a double-edged sword. When the news on Apple turns ultra-positive, Qualcomm's shares are less likely to pop. On the flip side, when the news goes south, Qualcomm is largely immune. The success and failure of a single vendor is not as important to Qualcomm as the health of the broader smartphone market. As long as the smartphone market thrives, so will Qualcomm, whether Apple gains back share against Samsung or not.

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