2012: The Year Qualcomm Became the New Chip King

There's no better way to play the booming smartphone market than Qualcomm (QCOM +3.23%), thanks to its potent combination of licensing and chip businesses that offer a unique place in the mobile value chain. In numerous ways, 2012 was a milestone year for the company; it posted record revenues of $19.1 billion as well as record mobile station modem chipset shipments this fiscal year.

What else did the company accomplish?

The new Intel?
Qualcomm was hit throughout the year by supply constraints from Taiwan Semiconductor (TSM +6.30%), which was having difficulties ramping up 28-nanometer production. Both of Qualcomm's newest Snapdragon processors as well as baseband modems are built on this manufacturing process, so the shortages were a double whammy.

TSMC even reportedly turned down bids from both Qualcomm and Apple (AAPL +1.17%), each of which was willing to put up upwards of $1 billion for exclusive capacity. The contract manufacturer doesn't need the money, and while it's willing to dedicate a small number of foundries to specific large customers, it'd like to reserve the right to be flexible and retain control.

Over the summer, CEO Paul Jacobs even entertained the idea that Qualcomm would build its own fabrication facilities, which would put it in the vertical integration leagues of Intel (INTC +4.36%). Building its own plants isn't something that Jacobs particularly wants to do, but he said he "wouldn't rule it out completely."

Such a move could put downward pressure on margins due to billions in more capital expenditures, but it would also strengthen the business by reducing supplier risk. For example, Intel has spent nearly nine times as much on cap ex over the past year, leading to lower net margins.

Source: Morningstar. TTM = trailing 12 months.

However, Intel isn't subject to third-party manufacturing hurdles. TSMC's 28-nanometer production has dramatically improved throughout the year, but not before holding back Qualcomm's bottom line.

Qualcomm and Apple, sitting in a tree
As the exclusive supplier of basebands for Apple devices, Qualcomm enjoys soaring iPhone and cellular iPad sales. When the third-generation iPad was launched in March, the LTE models carried a previous generation Qualcomm MDM9600 baseband built on a 45-nanometer process and only supported LTE in the U.S. and Canada.

That's one reason why Apple jumped the gun and launched a fourth-generation iPad just seven months later with mostly internal upgrades. That included moving to the newer LTE modems that offer broader LTE compatibility abroad and are built on the more power efficient 28-nanometer process.

The iPhone 5 is the first LTE-equipped iPhone, and its data is also served up by the Qualcomm MDM9615 modem, which is also a 28-nanometer ingredient. This chip also supports the TD-SCDMA standard that China Mobile (CHL +0.00%) uses, paving the way technically for a partnership between Apple and the largest wireless carrier in the world.

What about tablets?
So far, Qualcomm hasn't enjoyed much tablet upside. Its wins this year were primarily in smartphones while rival NVIDIA (NVDA +5.93%) scored tablet wins hand over fist, particularly with Google (GOOG +2.53%) Android devices.

Any mobile success that Microsoft (MSFT +0.66%) sees will benefit Qualcomm, as it's one of two primary ARM chip suppliers for Windows RT and the exclusive chipset supplier for Windows Phone 8.

Long live the new chip king
The mobile chip giant also saw an important symbolic milestone this year, surpassing Intel in market cap for the first time ever.

QCOM Market Cap data by YCharts.

In many ways, this represents how PCs continue to be disrupted by smartphones and tablets. Intel still relies on the PC market for revenue (69% of sales last quarter), while Qualcomm's entire business is built around smartphones. Which of these markets would you rather rely on?

Source: IDC.

That's just in market cap, but Intel still rules the semiconductor rankings by revenue. Qualcomm was able to jump three spots to No. 3 this year behind Intel and Samsung in terms of the global semiconductor market.

Source: iSuppli.

Intel is still top dog in terms of revenue, but the difference is that its semi sales declined by a modest 2.4% while Qualcomm's jumped by 27.2%. Still, if you go by market cap, Qualcomm became the new chip king in 2012.