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Qualcomm, Inc. Wins the Samsung Galaxy S7

By Ashraf Eassa - Mar 1, 2016 at 12:30PM

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A much-needed piece of good news for this chip giant.

Image source: Qualcomm. 

Ahead of the launch of the Samsung (NASDAQOTH: SSNLF) Galaxy S6 flagship Android smartphone, word leaked that Qualcomm's ( QCOM -2.73% ) then-flagship Snapdragon 810 processor would not make it inside the Samsung Galaxy S6 flagship phone. Shortly thereafter, Qualcomm admitted this in its Jan. 2015 earnings release.

This loss, coupled with "heightened competition in China" as well as broader share loss on the part of Qualcomm's applications processor customers to Apple ( AAPL -0.32% ), led the wireless giant to bring its revenue guidance down by about $800 million.

That said, a year later, Qualcomm looks as though it's back inside Samsung's flagship Galaxy S7 device, at least in the models that will be sold in North America and in China.

Qualcomm could use the revenue and margin boost
The Snapdragon 820 chip that powers some versions of the Galaxy S7 is the wireless giant's highest-performance mobile processor. I would expect that this means that it's also Qualcomm's most expensive and its highest margin.

Qualcomm's chip group has seen operating margin compress significantly over the last several quarters, with the company having projected operating margin in this business to be in the "low to mid-single digits" in the current quarter. Increased premium chip sales should certainly help bring in more higher-margin revenue, which should boost operating margin in the coming quarters.

This is probably more of a "sentiment" boost, though
Losing the Galaxy S6/Note 5 certainly served to negatively impact sentiment around Qualcomm stock, perhaps more so than the (very real) revenue impact. Investors have a habit of extrapolating trends (both positive and negative) from relatively limited data, and the loss of the Galaxy S6/Note 5 might have had (potential) investors thinking the following:

  1. Samsung kicked Qualcomm out of these phones, which could mean that Samsung isn't interested in using Qualcomm-designed chips for its flagships from here on out;
  2. Since Samsung has been able to replace Qualcomm with its own in-house applications processor, all other high-end smartphone vendors will do the same.

Seeing Qualcomm win a spot inside of the Galaxy S7 (and likely the upcoming Note 6) should quell investor fears around the first point. Additionally, with Qualcomm having won practically every premium Android smartphone of note at the recent Mobile World Congress, it's likely that the fears expressed in the second point above will fade into the background for now.

Things are looking up for Qualcomm
After a year of a seemingly endless stream of bad news, things are starting to look up for Qualcomm. Its chip business should benefit from both operating expense cuts as well as a potentially better sales performance of its Snapdragon processors in the marketplace.

Indeed, although revenue growth in the current fiscal year will be difficult to achieve (analyst consensus calls for an 11% drop), a return to revenue growth in the coming fiscal year seems like a good bet (analyst consensus calls for 6% growth). 

Additionally, though not the main focus of this article, Qualcomm's licensing business seems to be turning a corner as well, with the company having signed licensing agreements with major Chinese smartphone vendors such as Xiaomi and Lenovo over the last couple of months.

Although I was certainly early in buying Qualcomm stock, I think that over the long term the company, and the stock, should do well. With business fundamentals seemingly bottoming out, and with a very nice dividend yield of 3.72%, I believe that there's significantly more upside potential than downside risk for investors buying Qualcomm stock at current levels.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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