Internet-enabled devices are on the rise, and smartphone makers typically receive all the attention for their gadgets. But investors should remember that what's on the inside matters most -- and for mobile devices, that means Qualcomm's (QCOM +0.20%) patents.
Mobile is golden
A recent report by comScore shows that the amount of Internet-enabled mobile devices will outnumber desktops and laptops sometime between 2013 and 2014. That's more than just an interesting trend; it's like a cash register going off for Qualcomm. The company holds thousands of CDMA patents, and CDMA is one of only two cell-phone signal industry standards. Qualcomm collects 3%-5% from the mere activation of of every handheld device that runs on the standard. That means makers of everything from the iPad to Android phones to cheap TracFones have to pay Qualcomm for its technology.
To get a feel for how this works out for Qualcomm, let's look at how much Qualcomm potentially made from the opening weekend sales of Apple's (AAPL +0.00%) iPhone 5 in the U.S and China. We'll lowball the takeaway from each unit at just 3%.
|
Country |
iPhone Sales |
3% of Each Unit |
|---|---|---|
|
United States |
5 million |
$150,000 |
|
China |
2 million |
$60,000 |
So Qualcomm made about $210,000 in two weekends, without having to do any work or spend any extra money -- not too bad for a few days of someone else's work. And that's just one device, from one company, over two weekends.
Yeah, but what about 4G?
In the U.S., it's all about 4G. When carriers come out with a new smartphone, they advertise its lightning-fast 4G capability, but even 4G devices still need to have 3G capabilities, and the companies that make those new devices need to pay the patent piper. Keep in mind that Qualcomm owns 4G patents as well, albeit not as many as its 3G patents, so even the latest 4G devices need to use Qualcomm's patented tech as well. This is why Qualcomm has already signed 4G licensing deals with Nokia (NOK 0.89%), LG, and Samsung.
But despite the U.S. obsession with 4G, most networks run on 3G outside the United States. So as developing countries expand their mobile devices, Qualcomm will tap those new licensing revenue streams in addition to current ones.
More than one basket
Qualcomm's patents are very strong, but the company is also in the cutthroat mobile processor business as well. Nokia's Lumia 820 and 920 use Qualcomm's new Snapdragon S4 processor, as do about 23 other phones. The company also pushed Intel out of Apple's wireless baseband chip provider spot in the iPhone 4S and 5, which should lead to future chip sales. On top of all this, Qualcomm has about $26.8 billion in cash, which will certainly help the company in its future R&D efforts.
All of this, combined with Qualcomm's massive patent library, make the company a strong mobile player this year, and probably for years to come.
