Leading smartphone chip manufacturer Qualcomm (NASDAQ:QCOM) has inadvertently moved one step closer toward securing its dominance over the global market for such products. In a recent development, rival chipmaker Broadcom (UNKNOWN:BRCM.DL) declared its intention to either sell or shut down its cellular baseband business, moving out of Qualcomm's way in the process.
Known for its chips that offer integrated Wi-Fi and Bluetooth connectivity, Broadcom's business was probably unable to withstand the pressure of being sandwiched between high-end players like Qualcomm on one end, and low-end specialists like MediaTek on the other.
While that leaves Qualcomm in a much better position, with less competition to worry about, delve deeper into the ground realities before you decide to invest in this stock.
The changing smartphone landscape
Apart from the fact that its profit levels have increased at a far slower rate than they did a couple of years earlier, Qualcomm's revenue and profit guidance for the current quarter have stayed below analyst expectations. The company has borne the brunt of the recent slowdown in high-end smartphone sales in developed markets, making it necessary to focus instead on chips customized for low-end smartphones, a segment that has witnessed a surge in demand in emerging markets like China and India.
And what's brewing in China
Already the planet's biggest smartphone market in terms of shipments, China's importance to Qualcomm has doubled in recent months, thanks to the government's approval of the launch of 4G LTE services by local wireless providers. The company's obvious focus is on China Mobile (NYSE:CHL), the world's largest wireless provider with more than 770 million customers. Plus, with less than one-fifth of China Mobile's customer base currently subscribing to its LTE-based services, Qualcomm is well aware of the immense potential in the region.
But then, China Mobile also has to deal with its own set of problems, further complicating the situation for Qualcomm. Apart from having a homegrown 3G network standard that is not compatible with all handsets, China Mobile is also facing stiff competition from local players such as China Unicom and China Telecom that are also trying their best to get more customers to subscribe to their LTE services .
The active competition
While that opens up potential opportunities for Qualcomm, the company is having a tough time with local competitors such as MediaTek, whose low-cost chips can be found in less expensive handsets made by Chinese phone makers. Then again, not all competitors have given up on LTE-based aspirations like Broadcom.
Swedish wireless specialist Ericsson has come up with a new, low-cost, LTE-enabled chip, hoping to grab a share of the market that Qualcomm dominates. Incidentally, the new chip has already been certified by China Mobile as being compatible with handsets operating on its current network infrastructure.
What's good about it?
Even then, all this is unlikely to pose major challenges for Qualcomm in the near future, for more reasons than one.
For instance, China Mobile has already declared its intention to add 100 million subscribers to its new LTE network by the end of this year. With plans to invest a whopping $12 billion behind building its LTE infrastructure, China Mobile is also offering discounts on LTE-enabled handsets in a bid to win more customers.
With roughly 97% share of its overall revenue derived from the global LTE market, Qualcomm is still in a prime position to reap the benefits when China Mobile's LTE services start gathering momentum in the region. With a large percentage of the latter's subscriber base comprising cost-conscious consumers, Qualcomm's low-end Snapdragon 410 LTE-enabled processor should appeal to a lot of budget phone makers targeting this segment. The company has even revealed plans to sell smartphone processors customized for the Chinese market, and include a specific chip configuration called Octacore, which is preferred by local phone manufacturers.
Foolish final thoughts
Qualcomm's dedicated focus on the Chinese market is effectively complemented by China Mobile's ambitious plans to retain its dominance as the nation's leading wireless provider. Additionally, the former is also marketing itself as the preferred partner of choice to a number of local handset makers, many of whom have global aspirations as well.
On the technical aspect, the company's recent launch of its fourth-generation LTE-enabled processors is enough evidence of its clear dominance over the rest of the competition, including industry rival Intel, which has been struggling to market its first-generation products in this category. Go for Qualcomm if you haven't done so already, as this is likely to remain a safe and profitable addition to your tech portfolio for quite some time.