Qualcomm (NASDAQ:QCOM) is the undisputed leader in the merchant smartphone applications market in terms of unit and revenue share. Its chief rival, MediaTek, has traditionally competed well in the low end and mid-range of the China smartphone market, but it has been less successful in the development of chips aimed at premium smartphones, a market where Qualcomm has enjoyed success.
MediaTek has been talking about its next-generation premium smartphone processor called the Helio X30 for quite some time. The X30 is intended to be a competitor to Qualcomm's recently announced Snapdragon 835.
Recent commentary from a MediaTek executive suggests that the X30 is probably going to be a commercial flop -- a negative for MediaTek and a positive for Qualcomm.
A negative for MediaTek
One of the reasons that MediaTek is so keen to try to capture share in the high end of the smartphone market is that chips sold there tend to carry higher average selling prices, and potentially higher gross profit margin percentages, than chips sold into the low end and mid-range part of the market.
MediaTek's gross profit margin dropped from 43.2% of revenue in 2015 to just 35.6% of revenue in 2016. The company likely believes that if it can drive a richer mix of higher-end smartphone chips by winning away share with products like the Helio X30, it can drive its gross profit margins and, ultimately, total profitability up.
Unfortunately for MediaTek, a company executive recently disclosed that it isn't seeing much design traction for the X30.
"We don't see many projects on our latest high-end chip," MediaTek executive Jeffrey Ju reportedly said to the press, noting that "less than 10" smartphones will incorporate the applications processor.
A positive for Qualcomm
MediaTek is probably the only serious merchant chip competitor to Qualcomm in the high end of the smartphone market. Now, Qualcomm certainly faces competition at the high end from chips developed by smartphone makers themselves (Apple, Samsung, and Huawei are three examples), but MediaTek's inability to score designs with the Helio X30 is certainly good for Qualcomm's high-end chip business.
Based on this news, investors can reasonably expect that Qualcomm will continue to enjoy the high market share in the premium portion of the smartphone market that it had with the Snapdragon 820 series of chips.
Now, MediaTek may be able to find more success with future products, but Qualcomm is showing no signs of slowing down. Indeed, after a relatively painful product cycle with the Snapdragon 810 chip (though, admittedly, it still locked up the bulk of the industry's high-end smartphone designs during its time in the market), Qualcomm came back strong with the Snapdragon 820/821 and looks to extend that success with the Snapdragon 835.
If Qualcomm doesn't fumble as it did with the Snapdragon 810 and continues to invest heavily in future products, technologies, and business relationships with the major premium smartphone makers, its position in the premium smartphone market should remain strong.
To be blunt, the biggest risk to Qualcomm's premium chip business that I see is share gains on the part of premium smartphone makers that roll their own applications processors. To the extent that they gain share, Qualcomm -- by virtue of powering the rest of the premium smartphone market -- loses.
Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.