Is Samsung’s Shortfall Bad for Qualcomm?

With Qualcomm depending quite heavily on Samsung for chip and royalty business, is the recently reported Samsung shortfall going to prove a major negative to Qualcomm?

Jun 26, 2014 at 11:02AM

A little while back, an analyst from BMO Capital Markets downgraded shares of Qualcomm (NASDAQ:QCOM) on checks suggesting that Samsung's (NASDAQOTH:SSNLF) smartphone shipments were falling a bit short for the quarter.

With Samsung's CFO having recently made a statement suggesting that the second quarter didn't go all that well, the question now becomes whether Samsung's weakness spills over to Qualcomm, for which Samsung is a large customer.

If it's share loss to Apple, then probably
One possible explanation for Samsung's shortfall is possible share loss to smartphone giant, Apple (NASDAQ:AAPL). Note that while Apple is a large customer of Qualcomm's, there are two principal factors that would make share shifts from Samsung toward Apple at the high end unfavorable to Qualcomm:

  • Royalty per device is likely lower. Samsung manufactures its own handsets, and as a result it pays a percentage of the selling prices of those devices to distributors/carriers to Qualcomm. Apple, on the other hand, enjoys a licensing loophole in which the royalty is paid based on the price that Apple pays its manufacturing partners rather than the price that Apple sells the phones to the end users/carriers for. Put simply, the royalty rate for a high end Samsung phone is likely materially higher than that of a high end Apple phone. 
  • Chip content is lower. As detailed in my prior article, Samsung's flagship Galaxy S5 uses a lot of Qualcomm silicon content including integrated apps processor/baseband, transceiver, audio CODEC, envelope tracker, and power management IC. The iPhone 5s, in contrast, uses a discrete cellular baseband (not an integrated apps processor/baseband, which is likely more expensive) and an audio CODEC from Cirrus Logic. Qualcomm simply has more silicon inside of a flagship Samsung phone than a flagship Apple phone.

So, if it turns out that Apple is gaining share at the high end on Samsung, then Qualcomm could see a negative revenue impact. If Samsung is merely losing share to other Android vendors, then the situation is pretty neutral for Qualcomm as LG, HTC, and other high end players use similar silicon from Qualcomm.

If the high end device market is simply slowing down or seeing average selling price erosion, then Qualcomm gets hit on the royalty side of things (as these royalties are usually based on device selling price). It's a bit trickier to call on the chip side of things.

Low end phones are a source of strength, not weakness
Although the high end may be a weak-spot for Qualcomm, it is important to not underestimate the power of the low end in driving Qualcomm's business. The growth in low end 3G and the beginnings of the LTE ramp are at the expense of 2G devices that did not bear royalties. This means that while blended average selling prices for royalty calculations will go down, the sheer total number of units that bear royalty goes up.

On top of that, in the low end of the handset market, Qualcomm is well ahead with its LTE solutions, capturing about 80% share of LTE platform solutions among the China handset vendors with its Snapdragon 400 solution.

Keep in mind that despite the fact that the Snapdragon 400 is a lower end apps processor (and thus lower priced) than the Snapdragon 800 that goes in the high end, attach rates for other components like connectivity combo chips are very high for the apps processor vendor, driving potentially increased content share. The smartphone OEMs playing in the low end don't want to "mix and match" components -- they want the platform to be as cheap as possible since the competitive pressures are high and margins relatively thin.

The negative here is that while Qualcomm has a virtual monopoly on high end smartphone platforms, there is competition in the 3G market (MediaTek is a particularly fierce competitor)

Foolish bottom line
If Samsung's troubles are reflective of the overall smartphone market, then Qualcomm -- which is very dependent on the success of cellular devices -- will be negatively affected. Further, a mix shift from Samsung to Apple would also likely be a negative.

That said, Qualcomm is likely to see an offset to that as the low end of the market moves toward LTE, where Qualcomm would not only benefit on the licensing side of things (most LTE phones are LTE and 3G multimode so Qualcomm gets paid for its full suite of patents), but from the chip side of things as well considering its LTE modems are well ahead of those from competitors such as MediaTek and Marvell. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Cirrus Logic, and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers