Qualcomm Remains King of the Smartphones

Strategy Analytics recently released market-share data for smartphone applications processors for the second quarter of 2013, and the results were, quite frankly, unsurprising. Qualcomm (NASDAQ:QCOM), Apple, MediaTek, Samsung, and Spreadtrum were the top five players by revenue share, with Qualcomm capturing an outsized 53% of the entire market. It's clear that Qualcomm continues to be the undisputed market-share leader in smartphone applications processors, but with Intel (NASDAQ:INTC) and Broadcom (NASDAQ:BRCM) in the space, the question remains -- how long can the good times roll?

What has driven Qualcomm's chip success?
The key word in all computing platforms -- but in particular, smartphone platforms -- is "balance." It's not enough to have only the fastest graphics and CPU, nor is it enough to only have the lowest power consumption while performing these tasks. A great balance of all of these things is critical to having a platform that OEMs actually want to buy. However, unlike the tablet and PC spaces -- where computing and graphics power within a given power envelope is the name of the game -- there's an additional complexity in this space: communications.

At the end of the day, a smartphone is so useful because it's always connected. Whether someone is surfing the web via a Wi-Fi hotspot in a café or if a user is lost in the middle of nowhere and needs to pull up the MapQuest app in order to find the nearest Italian restaurant, the smartphone is an all-purpose tool that keeps users connected to vital people and information nearly constantly. As smartphones continue to become "smarter" at all price points, the need for better processing power and faster connectivity continues to grow. The integration of fast computing power and the ability to get that data to the computing engines is Qualcomm's specialty.

In particular, Qualcomm currently ships a leadership suite of mobile processors, each featuring very competitive graphics processing units and power-efficient processor cores. In addition, many of Qualcomm’s chips integrate the cellular baseband processor as well as the digital portions of Wi-Fi, GPS, and Bluetooth functionality. While in mid-range and high-end smartphones such integration isn’t strictly necessary, such integration is important for chips going into price-sensitive devices.

But it's not even just the integration -- it's having the right IP. Qualcomm is shipping cellular modems today that sport LTE-Advanced while its nearest competitors are just on the cusp of shipping their first LTE modems. Given that Qualcomm's modems seem to almost always come paired with a Qualcomm apps processor (either integrated or discrete), it's no surprise that the high end of the market belongs to Qualcomm. There just aren't any credible competitors in any market that requires a high-end apps processor and an LTE solution.

At the low end of the market, Qualcomm is still able to compete with products designed for the low end. These feature significantly less powerful graphics and off-the-shelf low power, low cost ARM cores. The margin pressure is certainly there, but Qualcomm leverages its scale and success at the high end in order to profitably compete at the low end.

Are competitive threats on the horizon?
The major tenet of a potential bear thesis on Qualcomm is that this gravy train at the mid-range and the high end could soon dry up either in the form of margin compression and/or market-share losses as other players contend for this market. Interestingly enough, Qualcomm's lead is so marked that iSuppli believes that Apple is paying a hefty $32 for Qualcomm's MDM9615 + WTR1605L + Front End. This doesn't even include an integrated applications processor -- it's just the modem.

Many competitors, including Broadcom and Intel(NASDAQ:INTC) believe that they will finally bring meaningful competition to this space. Broadcom's recent acquisition of Renesas Electronics' LTE assets buys it a low-end apps processor with integrated LTE suitable for a number of lower-end markets, but its own discrete higher-end modem won't hit the market until the second half of 2014. Intel's first-generation discrete LTE, the XMM 7160, will ship paired with its own apps processor by the end of 2013, but it won't be until the first half of 2014 -- if Intel hits its targets -- that Intel will have a cellular solution that sports the high-end features that its Qualcomm contemporary will.

It seems that better competitive efforts are on the horizon and that 2014 will finally be the year in which Qualcomm either gives up market share, margins, or both. But it is still very likely that Qualcomm retains its key heavy-hitter sockets, such as the iPhone and perhaps the next Galaxy S/Note products. The overall growth in the underlying market for LTE will still likely keep Qualcomm growing at a robust, if perhaps lower, rate.

The Foolish bottom line
Qualcomm is best-in-class at what it does and its market share in the smartphone apps processor space is very well-deserved. The primary reservations that I have here are that this is largely priced in and there's a real risk that the competitive efforts may be much stronger than expected (and I really am expecting non-trivial, but not critical, share loss). While the risk of the share price collapsing is rather low, bottom-line growth may be muted.