Qualcomm's Long-Term Prospects Are Still Intact

Despite weak performance in the second quarter, Qualcomm can get better.

Jun 25, 2014 at 2:00PM

Qualcomm (NASDAQ:QCOM) has appreciated steadily so far this year, despite reporting weaker-than-expected second-quarter results in April. The chipmaker faced a slowdown because of slow smartphone sales in China. However, the hiccup should be temporary, as Qualcomm is expected to benefit from the deployment of LTE in China by China Mobile (NYSE:CHL). Moreover, since rival Broadcom (NASDAQ:BRCM) has pulled out of the cellular baseband business, Qualcomm might find the going a bit easier.

Prospects in China
The company is seeing strong demand for its multi-mode 3G LTE chipset solutions, especially in the Chinese market where budget phones are popular. Looking ahead, Qualcomm expects stronger sales in China with the rollout of LTE. The company expects growth to pick up pace in the near future, as it has invested heavily in chipsets for LTE devices in China.

China Mobile's aggressive rollout will be a growth catalyst for Qualcomm. China Mobile is planning to expand its network coverage nationwide to more than 350 cities. To achieve this target, it will build 500,000 LTE base stations by the end of 2014. Moreover, China Mobile will start providing discounts on LTE smartphones to further fuel growth.

China Mobile expects shipments of LTE handsets to hit 200 million units this year, and since it is playing its part to drive adoption, Qualcomm should benefit. The chipmaker has seen robust LTE designs win momentum with OEMs in China, driving demand for its multi-mode LTE chipsets.

Although Qualcomm has experienced low penetration rates in 4G LTE so far, adoption is still in early stages in China. It is expected that Qualcomm's business will rise gradually with the rapid growth of smartphones in the country, driven by its low-cost chipsets.

According to Gartner, approximately 1.9 billion smartphones will be shipped worldwide in 2018, while cumulative smartphone shipments between 2014-2018 will hover around 8 billion. Qualcomm expects to benefit from this secular growth as the company sees strong 3G/4G device shipments going forward.

Product development
To tap the smartphone market, Qualcomm has expanded its product portfolio. It has more than 100 single-mode 4G OFDMA licenses, including 60 in China, and nearly 255 CDMA-based licenses across the world. This should enable it to benefit from the secular growth in smartphones. 

Qualcomm's CDMA technologies segment offers comprehensive chipset solutions such as CDMA, UMTS, GSM, and LTE technologies for all types of smart devices in 3G and 4G networks. Its combined portfolio now offers extensive features such as an array of high-performance, end-to-end solutions ranging from Wi-Fi, GPS, Bluetooth, FM, and Ethernet, which should help boost sales.

Qualcomm's Wi-Fi business is growing at a healthy pace. The chipmaker witnessed a robust yearly growth of 45% in Wi-Fi shipments in the previous quarter. The company has more than 350 802.11ac Wi-Fi designs, including more than 250 in mobile. Qualcomm has announced its next innovation in Wi-Fi, with a comprehensive set of products that use multi-user MIMO to make the 802.11ac networks more efficient, delivering an improvement of up to three times in throughput.

Broadcom's exit to take some pressure off
Qualcomm's strong product innovation should help the company strengthen its position in the baseband market, to a great extent. Since rival Broadcom has decided to exit this market, Qualcomm will now have to contend with fewer competitors. Earlier this month, Broadcom announced it is exploring strategic alternatives for its baseband business. Broadcom's exit is a result of rising competition in the baseband industry, and the company expects to save approximately $700 million as a result of the sale.

Broadcom has spent nearly $3 billion in research and development on cellular basebands in the last seven years, according to Forbes, but never earned a profit. However, the company did land a few design wins with key smartphone players such as Samsung, so its exit should aid Qualcomm's long-term prospects.

The bottom line
Although Qualcomm's recent results were not up to the mark, the company's long-term prospects look intact. Growth in the Chinese smartphone market, and innovations in Wi-Fi technologies, will help the company get back on track. Investors should have confidence in Qualcomm, as it looks like a solid pick.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends China Mobile. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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