Google's (GOOG +1.71%) Nexus line of devices has delivered exceptional bang for the buck in both the smartphone and tablet markets. For $229, the Nexus 7 tablet offers great processing power, lots of RAM, a gorgeous screen, and modern connectivity – it's the tablet to beat. Now, for $349, Google's Nexus 5 – which offers a top-of-the-line processor, lots of RAM, a gorgeous screen, and modern cellular and connectivity capabilities -- really sets the bar in its price range. While Google itself doesn't really profit directly from these device sales (it essentially sells them at cost to get people into the Android ecosystem), there is one real winner: Qualcomm (QCOM +1.29%).
Nexus 5 uses top notch, high-dollar value Qualcomm silicon
Google is sparing no expense on the bill of materials, as the Nexus 5 employs Qualcomm's latest-and-greatest Snapdragon 800 processor along with a Qualcomm RF front end. Even if Google isn't making money off of the hardware, Qualcomm certainly is from both the actual silicon content of the device (which could be north of $50 based on $40 for the apps processor and $10 for the RF front end) as well as the royalty that it collects by virtue of the fact that it is, in fact, a cellular device.
Now, this isn't anything new – Qualcomm's silicon powered last year's Nexus 4, so given that there is still absolutely no credible competition in the high end phone apps processor and cellular modem space, it's no surprise that the Nexus 5 also sports Qualcomm silicon. However, this speaks to a very salient point: Qualcomm is still unopposed in the smartphone space.
Competitors have tried....
Qualcomm has been shipping top-notch apps processors and LTE basebands (often integrated on a single chip) since 2011 and since then many challengers have talked about competing here, but very few have actually succeeded. For instance, Broadcom (NASDAQ: BRCM) became a Wall Street darling for a while following its demonstrations of its own LTE-Advanced baseband. In fact, the speculation ran rampant that Apple would adopt Broadcom's solution which drove Qualcomm's shares into the high $50 range while elevating Broadcom's into the high $30s.
Intel (INTC +0.00%), too, had promised last year that its XMM 7160 chip (first generation multimode LTE solution) would ship paired with its Clover Trail+ smartphone platform that debuted in the early part of 2013 (and saw some success in devices such as the Lenovo K900), but it was late – only just hitting devices this week. Intel has promised that its XM 7260 (2nd generation LTE-Advanced multimode baseband and RF solution) will be in devices during the first half of 2014; if it can deliver, then this could be a very competitive part with whatever Qualcomm has out at the time.
Finally, it's hard to forget that Samsung is very aggressively pursuing its own baseband efforts (with RF transceiver provided by Silicon Motion), but these efforts, too, have yet to pay off. If they do, then Qualcomm's QCT business is at significant risk since 90% of Samsung's LTE phones come packed with Qualcomm silicon. Of course, as the entire industry has shown, evicting Qualcomm from anything cellular is much easier said than done.
But will anybody succeed?
There's no question that 2013 was an absolute blowout for Qualcomm. The smartphone space continued to boom and it grabbed all of the major phone designs. The tablet space, too, was an apparent clean sweep for Qualcomm as its competitors fumbled badly. Next year, things get more challenging, as Intel likely emerges as a solid No. 2 in the smartphone space and continues its aggressive push in tablets. Broadcom, Marvell, and NVIDIA will also finally begin fighting in earnest here.
Until then, Google's going to sell a lot of Nexus 5 devices with premium Qualcomm silicon (as will many other device vendors), and Qualcomm shareholders should expect some very solid results from the company at its Nov. 6 earnings report.
