What: Shares of Qualcomm (QCOM 0.85%) fell 10.1% in June, according to S&P Capital IQ data. Concerns about tougher competition resulting from the merger of Broadcom (NASDAQ: BRCM) and Avago (AVGO 2.08%), as well as competition from Intel (INTC -0.80%) and Samsung (NASDAQOTH: SSNLF), weighed on the shares.
So what: At the end of May, Avago announced a massive $37 billion deal to buy Broadcom, the largest technology acquisition in history. IDC analyst Mario Morales expects the merger to give mobile-device makers an alternative supplier for certain chips. Broadcom currently competes with Qualcomm in the Wi-Fi and Bluetooth chip markets, while Avago sells a variety of RF components.
Neither Broadcom nor Avago sell baseband or app processors, but Broadcom does plan to enter the ARM server CPU market, and the merger with Avago makes the company a larger threat to Qualcomm in that area.
Qualcomm is also facing renewed competition from both Samsung and Intel, drawing a downgrade from an analyst at Drexel Hamilton in June. Samsung competes with Qualcomm in both the baseband and app processor markets, and it used its own app processor in its latest flagship Galaxy S6 phone. The analyst pointed to aggressive pricing from Samsung in an effort to win business from other device manufacturers. Intel has also been pushing hard into the mobile market, subsidizing its mobile chips in an effort to win market share.
Now what: More competition may mean that Qualcomm will face pressure from its major customers to cut prices, and the Drexel Hamilton analyst points out that large customers such as Apple, as well as smaller Chinese device makers, are requesting price breaks. With Intel and Samsung being aggressive on price, this could have a significant impact on margins in Qualcomm's chip business.
However, most of Qualcomm's profits come from its licensing business, and while there was news in May that the European Union was investigating Qualcomm regarding its business practices, none of the developments in the chip business have much effect on the licensing business.
Qualcomm has dominated areas of the mobile market for years, and new competition could chip away at that dominance. Judging from the decline in the stock price during June, investors are certainly concerned. But with the licensing business providing much of the company's profits, that concern may be a bit overdone.
