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Qualcomm Jumps Into the Networking Ring

By Ashraf Eassa - Nov 20, 2013 at 1:30PM

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Qualcomm's micro-server rumors turn out to be something different (and more relevant) - a networking chip!

Qualcomm (QCOM 2.34%), the leading vendor of smartphone apps processors and modems, announced an interesting new product category – the Internet Processor. These processors essentially take many of the key, battle-hardened IP blocks from the company's Snapdragon mobile processors, couple them with specialized blocks useful for networks (in this case a network accelerator, security engine, and PCI Express lanes), and then bam – new product category revealed. The big question for investors, then, is how these parts fit into the competitive landscape and what kind of market is there for them?

Could this be Qualcomm's rumored "server" effort?
It has been widely speculated that Qualcomm had plans to enter the micro-server space. While Qualcomm's own management had, at numerous investor calls, pointed out that the company didn't necessarily need to be in this space (as it would be crowded), it was hard to ignore many of the "clues" – including the fact that Qualcomm's former Chief Marketing Officer was reassigned to a new role in which he would be working on "enterprise related initiatives." While the obvious "go to" idea for a chip company trying to remain "hot" would be micro-servers, this Internet Processor makes more sense.

Why does it make more sense? Well, this is essentially a low power/low cost networking infrastructure processor. Given that Qualcomm's forte is communications technology it comes as no surprise that Qualcomm would want to expand its product offerings to home networking infrastructure. That being said, this won't be easy – at all.

Qualcomm, meet your competition
The networking processor space is intensely competitive with many established players competing for their piece of the pie. Probably the fiercest competitor in this space is Intel (INTC 1.46%). Indeed, the chip giant recently released its own highly integrated system-on-chip products for the low end networking/router/switch space called "Rangeley."

From what this Fool can tell Intel's product lineup in this space (which goes up to 8 Silvermont cores, and includes all of the network acceleration goodness) is overwhelming. As far as performance goes, Intel's Rangeley parts scale up much higher (more cores, and each core is faster than the low-clocked Krait 300's found in these new Qualcomm parts), and performance-per-watt should be a no brainer thanks to Intel's superior 22 nanometer FinFET process against TSMC's 28nm LP (this isn't even the best flavor of the process).

Not a huge market
Furthermore, these chips also seem to be geared more toward home networking rather than broader communications infrastructure, which significantly limits the TAM compared to the overall network processing market. This means that Broadcom (NASDAQ: BRCM), which makes a pretty penny off of networking infrastructure chips, doesn't have to worry too much about Qualcomm's entry here. Indeed, Broadcom's high-end network infrastructure chips are still many leagues ahead of what Qualcomm has announced here (although that's not to say it doesn't have plenty of competition of its own).

Foolish bottom line
Quite frankly, this probably won't move the needle for Qualcomm, which is set to rake in about $27 billion in net revenues during its fiscal 2014, primarily from its mobile chip business. With strong competition (Qualcomm isn't gunning for general networking infrastructure – more the connected home) and a fairly restricted TAM, it seems that this is much more of a "let's see where it goes" type of product rather than something that is expected to drive meaningful chip unit volume growth. That being said, there are plenty of other goodies coming that will help Qualcomm do just that in its home field of mobile processors. 

Ashraf Eassa owns shares of Intel and Broadcom. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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