Please ensure Javascript is enabled for purposes of website accessibility

Qualcomm Reportedly Just Beat Back MediaTek

By Ashraf Eassa – Apr 26, 2018 at 2:34PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Qualcomm's new chips apparently allowed it to snatch orders away from this key rival.

According to a new report from DigiTimes, which often posts accurate information about smartphone supply chain machinations, wireless chip vendor MediaTek had been "optimistic that its gross margin and revenues would pick up drastically during the second quarter of 2018."

That optimism was fueled by the expectation that top Chinese smartphone vendors Xiaomi, Oppo, and Vivo -- which collectively controlled an estimated 46% of the China smartphone market in the fourth quarter of 2017 -- were set to adopt MediaTek's latest Helio P60 applications processor. 

Unfortunately for MediaTek, wireless chip giant Qualcomm (QCOM 4.39%) will be launching its next-generation Snapdragon 700-series smartphone processors "at highly competitive pricing ahead of schedule in May," according to DigiTimes, which says its anonymous sources have said that Chinese smartphone vendors "significantly cut their orders with MediaTek before turning to Qualcomm."

Let's go over some of the investment implications for Qualcomm if these rumors are true.

A Qualcomm chip platform.

Image source: Qualcomm.

Leadership technology pays off

Although MediaTek develops capable products, the reality is that Qualcomm tends to be at least a step ahead of its smaller rival in terms of technology capability. 

Qualcomm's cellular modem technology tends to be superior to MediaTek's, which is several generations behind Qualcomm's best in terms of features and capabilities, and Qualcomm leverages its expertise as a major vendor of chips for premium smartphones to strengthen the capabilities of its high-end, mid-range, and even low-end chips. 

That technology superiority pays off for Qualcomm because the smartphone market is cutthroat, and smartphone vendors often don't want to put themselves at a competitive disadvantage by using inferior chips.

But Qualcomm's not in the clear

Since Qualcomm has such a strong technology position in its core wireless chip business, I don't think Qualcomm investors should worry that the company will lose significant share to MediaTek or other smaller wireless chip makers anytime soon. In fact, there's a good chance that Qualcomm can continue to gain share at the others' expense. 

The real problems for Qualcomm's chip business are the following:

  1. A slowing overall smartphone market.
  2. Increased vertical integration by high-end smartphone manufacturers. 

There's not much Qualcomm can do about a slowing smartphone market and that's just a fact of life that the company and its stockholders will have to accept. The second risk is that some of Qualcomm's key customers will choose to either vertically integrate (i.e., make their own chips), or that those Qualcomm customers that already have internal chip efforts will displace Qualcomm further from their product lines. 

Key Qualcomm customer Samsung uses both Qualcomm chips as well as its own home-grown processors in its flagship smartphones. Huawei, too, seems to be shifting its product lines increasingly toward its own internally developed Kirin processors and away from Qualcomm's Snapdragon chips. 

Even Xiaomi, a company that has benefited tremendously from Qualcomm's work in both chips and reference designs, is trying to build its own chips

Considering that much of the industry's smartphone volume is consolidating to just a handful of vendors, and considering those vendors are going to try their hardest to find any and all points of differentiation as they battle for market share in a slowing overall industry, vertical integration continues to be a significant risk to Qualcomm's business. 

The onus is now on Qualcomm to continue building technology that's compelling enough that the competition can't build anything that matches it, let alone beats it, for the foreseeable future. 

Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$122.37 (4.39%) $5.15
MediaTek Inc. Stock Quote
MediaTek Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.