For Qualcomm (Nasdaq: QCOM), 2010 should be remembered as the year the mobile revolution took off. The company makes its living off patents behind the pivotal 3G technology that streams data over the airwaves, enabling the rise of constantly connected devices like smartphones. With Gartner recently reporting that smartphone shipments grew 72% in 2011, Qualcomm is raking in profits, and in 2011, the good times should only keep getting better.

However, for every great stock story, there are also risks following the company. That's why we're examining not only the key opportunities investors should be watching at Qualcomm, but also the key threats that could send the company's stock collapsing.

What to watch for: The good
Qualcomm's share price cratered through the first half of 2010 thanks to fears of declining phone selling prices. Even if phone shipments are taking off, if the prices of those phones are declining at the same time, Qualcomm's slice of industry revenues won't grow at outsized rates. Part of the problem was Nokia, which controlled 35% of the mobile industry at the start of the year but was slashing prices because of fierce competition.

Luckily for Qualcomm, one of the mobile industry's dominant trends of 2010, the growth of Google's Android provided a needed boost that rocketed its stock price skyward in the second half of the year.

There was a double-whammy of factors that explained why Android was so beneficial to Qualcomm:

  • Several Android phones filled the high-end niche, selling at high prices Qualcomm received a cut off. Throughout the year Motorola Mobility (NYSE: MMI), HTC, Samsung, and a host of other companies sold Android-models that became flagship phones at carriers like Verizon (NYSE: VZ) and Sprint. These high-end flagship phones command non-subsidized prices upward of $500 from carriers, which in turn boosts the amount of royalties Qualcomm collects.
  • Not only did Android phones mean more royalties to Qualcomm, they also boosted the company's chipset business. Qualcomm's Snapdragon processor bundled communications features that connect to data networks with a mobile processor designed by the company. It has proven especially popular in Android handsets, repeatedly besting rival offerings from NVIDIA (Nasdaq: NVDA), Texas Instruments (NYSE: TXN), and Marvell (Nasdaq: MRVL). Qualcomm's marrying of communications and processing saves both power and space and can create cost savings by cutting out other components. This creates a compelling package for smartphone manufacturers looking for better battery life with limited space available.

Finally, another boost to Qualcomm has been its budding relationship with Apple (Nasdaq: AAPL). Qualcomm recently won a contract to supply the baseband chip (a chip that takes RF signals and processes them so the central processor can understand them) for Verizon's iPhone 4. It's widely anticipated that Qualcomm could win the contract to supply baseband processors for all iPhone models when the company releases its fifth generation iPhone this summer. The New York Times is even reporting that Qualcomm could supply a Near Field Communication (NFC) chip for a future iPhone model, which would be a stunning move since Qualcomm isn't known for its expertise within that space.

What to watch for: The bad
While Qualcomm's riding a boom of royalty payments and Snapdragon orders, there are some areas of key concern surrounding the company.

  • Qualcomm's not exactly cheap; it trades for 17 times this fiscal year's estimated earnings. That's mitigated in part by the company's large cash pile; Qualcomm has about $19 billion in short and long-term investments. However, keep in mind that large multinationals like Qualcomm are subject to repatriation taxes on foreign-held cash that can reduce the value of cash holdings brought back to pay dividends by as much as 35%.
  • Many of the foundational patents Qualcomm filed around its central CDMA technology (from which it derives licensing revenue) are reaching the end of their lifetime. Qualcomm has layered over a series of supporting patents, which should protect its technology, but there's always a threat that manufacturers could increasingly challenge Qualcomm's licensing structure in future rounds of payment negotiations.
  • Qualcomm's chipset business is strongest with Verizon and Sprint's networks; both companies run a network that Qualcomm has a virtual monopoly on in certain areas like baseband processors. However, they're both moving to technologies like LTE and WiMAX for their next-generation networks. As these companies shift to technologies that have more competitive dynamics, Qualcomm's chipset margins could come under pressure.
  • While Qualcomm has been dominant in smartphones, its integrated approach might not be as appealing in tablets. In tablets, space and power savings take a backseat to raw processing power. NVIDIA's dual-core Tegra processor has been an early favorite in this market, and it looks ready to beat Qualcomm's next-generation quad-core processor, which is aimed at tablets, to the marketplace.

Final thoughts
Qualcomm's a company that's been firing on all cylinders in recent quarters, but threats still remain. The best way to stay ahead of these challenges is to be aware of the pressures facing the company, and keep up with the news surrounding Qualcomm. The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up to date news on companies like Qualcomm, or any of its competitors. To get up-to-date Qualcomm news and analysis, add the company to your watchlist today:

Eric Bleeker owns shares of NVIDIA. Google is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Apple and NVIDIA are Motley Fool Stock Advisor picks. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple, Google, Marvell Technology Group, Qualcomm, and Texas Instruments. 

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