Qualcomm is likely to increasingly lean on its semiconductor operations, as it faces multiple challenges from its bread-and-butter technology licensing business, which has been embroiled in multiple legal battles with both regulators and key customers such as Apple. In this note, we take a look at some scenarios related to Qualcomm’s chip business which could potentially impact the price of its stock. We have created an interactive model that details how changes in market share in both the mobile station modem and Server CPU markets could impact Qualcomm’s market price. You can modify assumptions such as earnings multiples, margins, processor prices and others to see the dynamics of the market share/market price sensitivity change.
Some Headwinds In The Modem Market
Qualcomm’s MSM business – which sells modems, app processors, and systems-on-chips (SoCs) and currently accounts for a bulk of its semiconductor revenues – could face challenges going forward. Competition is increasing, with the likes of Intel and Samsung doubling down on the modem market and companies such as MediaTek and Spreadtrum also vying for a share of the lower end of the market. Apple began reducing its dependence on Qualcomm modems with the iPhone 7, which sported Intel modems on some variants. There have been reports that Apple could drop Qualcomm’s chips altogether from its iPhones and iPads starting in 2018, building its devices with modem chips from Intel and possibly MediaTek. While we don’t assign a very large probability of this happening in the near term, given the strong performance of Qualcomm modems, the possibility of Apple increasing its rate of migration away from Qualcomm chipsets could nevertheless hurt the company.
Qualcomm’s Server Bets Can Add Value
While the core modem operations face competition, Qualcomm is looking to make a dent in the server market. The company launched its new 48-core Centriq processor with Arm-based SoCs for cloud applications. The data center market could be valuable to Qualcomm for multiple reasons. Although server chips are a smaller market in terms of volumes compared to mobile device chipsets, they have much higher ASPs and potentially better margins. For instance, the new Centriq chips will be priced at $1,995 each, compared to mobile chipsets which often cost under $50 each. The current market conditions could also be conducive to Qualcomm’s entry. Intel practically controls the entire market for server processors , giving it significant pricing power. However, data center operators have been seeking a competitive alternative to Intel, and it’s possible that they could embrace Qualcomm’s offerings.
