Qualcomm Is Best in Class, But Concerns Loom

Qualcomm (QCOM 1.41%) is a best-in-class mobile and wireless semiconductor company. Its cellular modems are, bar-none, the best out there, and its complete top-to-bottom stack of mobile applications processors is certainly impressive. Unfortunately, with the company's 2014 guide coming in below expectations, the concerns that many bears/skeptics have been voicing for quite some time have now begun to show themselves. Qualcomm's days as a high-growth name have come to an end, and despite a technological leadership in all things mobile today, the share price is now likely to be more sensitive to threats from Intel (INTC 0.64%), NVIDIA, and MediaTek as the underlying markets saturate and the battle to maintain share begins. 

Intel attacks the high end
The single biggest threat to Qualcomm's chip business over the longer term is Intel. While MediaTek is undoubtedly the biggest near-term threat as it continues to move up from its dominant position in lower-tier handsets into higher-tier ones, particularly in China, over the longer haul Intel is the most likely to offer the fiercest competition to Qualcomm across the entire spectrum of its products.

In tablets, Intel has moved extremely quickly to offer competitive products, and with its recently announced Atom Z3000 chips, it competes extremely well with Qualcomm's latest-and-greatest Snapdragon 800 (Intel has a faster CPU, slower GPU, but power consumption for both is unknown). The company is also feverishly working to bring down the power envelopes of its crown jewel "Core" processors for premium devices. It is very likely that Qualcomm will face unprecedented competition in the high end of the tablet market from Intel next year.

In smartphones, Intel isn't as big of a threat today, but it – once again – has the ingredients to be an equal here. Infineon Wireless is a recognized leader in RF and at the proper investment level (which Infineon Wireless as a part of Infineon could not afford, but as part of Intel it can) there's very little to keep Intel from taking a good part of the mid to high-end merchant mobile SoC market over the next 2-3 years.

MediaTek comes from below
MediaTek will be an issue for both Qualcomm and Intel. The company is growing like a weed and is taking low end to even mid-tier apps processor share (integrated with modems, too) like there's no tomorrow. Qualcomm indicated on its call that it would be focusing its R&D on reducing the cost structures of its lower end mobile chips (where all of the growth is) – clearly in order to do battle more effectively with MediaTek.

The fundamental issue, though, is that at the very low end of this market, there is very little value in technological differentiation. Even Qualcomm licenses the same off-the-shelf, low-end ARM Cortex A7 processors that MediaTek and the rest of the low end/low cost Asian players use. The key to this particular market is simply scale – it's essentially a commodity. If you can hit the required feature sets, then it's really about which company is willing to sell at the lowest price. This is in stark contrast to the high end where the handset/tablet vendors don't want to be selling products with an inferior chipset for fear that their devices won't be able to command a premium.

It's not all bad, though
It's not all bad for Qualcomm – the problem here is one of slowing growth and potential margin compression rather than much risk of seeing negative growth. It also pays to remember that Qualcomm's cash cow – wireless patent licensing – is still a wonderful cash cow and still generates more earnings before tax than the company's entire chip business. The company is also looking to expand its chip reach into new areas including set top boxes (an area currently dominated by Broadcom and ST-Microelectronics) and "enterprise applications" (read: micro-servers).

Furthermore, while the recent earnings report "spooked" investors, the company does have its analyst day coming up on Nov. 20, at which the company usually presents an upbeat outlook and aggressive growth plans to generate buzz again. Although challenges do loom and the monopoly on the LTE market is likely to come to an end, the company is high quality. Once the stock has pulled back a bit more, it's still likely to be a good long-term play on the continued growth of mobile devices.