3 Promising Markets for Qualcomm Inc.

Qualcomm (QCOM 1.41%), the largest mobile chipmaker in the world, faces tough competition in the smartphone and tablet markets. Lower margin rivals like are gaining ground in the lower-end market. Samsung (NASDAQOTH: SSNLF) also replaced Qualcomm's processors and wireless modems with its own designs in its newest flagship devices, which forced Qualcomm to slash its full-year sales guidance by over $1 billion in April.

Source: Qualcomm.

During the first nine months of 2015, Qualcomm's chipmaking revenues slipped 2% annually as earnings before taxes fell 21%. That decline caused the stock to drop over 20% since the beginning of the year. To pull out of that dive, Qualcomm is diversifying its chipmaking business away from smartphones and tablets and into three new markets.

Data centers
Intel (INTC 0.64%) has a near monopoly in data centers with its Xeon chips. But last year, Qualcomm revealed plans to enter that market with ARM-based server CPUs. In early October, Qualcomm started sampling a development platform, which uses a 24-core Qualcomm CPU with custom ARM cores, to tier-1 data centers. Qualcomm declared that these chips "will be competitive in performance and price" with Intel's.

Qualcomm is pairing its data center CPUs with Xilinx's FPGAs (field-programmable gate array) for workload acceleration. FPGAs can be reprogrammed, which makes them popular among industries that need chips dedicated to specific tasks. That partnership directly counters Intel's acquisition of Xilinx's FPGA rival Altera earlier this year. Qualcomm is also working with InfiniBand/Ethernet connectivity hardware and chip developer Mellanox to optimize its networking equipment for its server CPUs.

No one expects Qualcomm to replace Intel as the dominant brand in data center chips, but the company could eventually loosen Intel's iron grip on the market with more power-efficient ARM-based designs.

Connected cameras
Qualcomm is also challenging Ambarella (AMBA 3.18%) in the market for image processing SoCs (system on chips) for action cameras, drones, and security cameras. Ambarella's SoCs are considered more cost effective than Qualcomm's, but with cellular integration factored in, Qualcomm's SoCs could be a better bargain, according to Morgan Stanley analysts.

Several 4G action cameras, like the 4GEE Action Cam and Benq's QC1, already use Qualcomm's SoCs instead of Ambarella's. Qualcomm also recently started selling an all-in-one chip reference design, called the Snapdragon Flight platform, for drones. Qualcomm claims that the design -- which handles all flight control, recording, and communications with a quad-core Snapdragon 801 chip -- will dramatically cut drone development costs. Yuneec Electric Aviation, a major Chinese drone maker, already signed on as Qualcomm's first major Snapdragon Flight customer.

The Snapdragon Flight reference design. Source: Qualcomm.

This is bad news for Ambarella, since major customers could be lured away by Qualcomm's cheaper SoCs. To complement that push, Qualcomm recently revealed a new reference design for Internet-connected security cameras as well.

The Internet of Things
Qualcomm's expansion into connected cameras directly is part of its broader push into the Internet of Things (IoT) market, which consists of everyday objects connected to each other and the cloud. 

Qualcomm is producing smaller, lower-powered chips for this booming market, which includes wearables, smart appliances, and connected cars. It also recently announced cheap modem chips for smart meters and other industrial devices, which could expand its presence to the underlying infrastructure of "smart cities" worldwide.

To further expand its presence in connected devices, Qualcomm acquired CSR, a maker of Bluetooth, wireless, and car infotainment services, for $2.4 billion earlier this year. To ensure that all IoT devices can "talk" to each other, Qualcomm established the AllSeen Alliance, a consortium that supports its AllJoyn software framework for connected devices. These investments might not pay off right away, but they can help Qualcomm profit from the long-term shift from individual mobile devices to connected objects.

The road ahead
While data centers, connected cameras, and IoT devices represent promising new markets for Qualcomm, investors should remember that the bulk of its chipmaking revenues still come from smartphones and tablets. Therefore, it could be years before these businesses generate meaningful enough revenues to be reported separately. Nonetheless, Intel and Ambarella investors should take note of Qualcomm's shifting strategy, which could impact their long-term plans.