Taken together,
Apple (
AAPL) and
Qualcomm (
QCOM) are the twin engines driving the
smartphone market. The Apple business model demands closed,
horizontal integration, where the company largely manufactures its own hardware
and software. Alternatively, Qualcomm effectively functions as a workbench for
the entire mobile, or wireless industry. Qualcomm and its team of engineers
license out microprocessors to the likes of
Dell (
DELL),
Nokia (
NOK),
BlackBerry (
BBRY), and
Samsung (
SSNLF.PK).
Amid today's Web 2.0 Revolution, Qualcomm is the new
Intel (
INTC). Throughout the
1990's PC Revolution,
Microsoft (
MSFT) and Intel were both joined at the hip, as the
ultimate foils to Apple. After Y2K hysteria came and went, however, the PC
became a commodity. Today, Intel is effectively a utility stock that monopolizes
its particular zero-growth niche, and pays out regular dividends. Going forward,
Qualcomm shareholders are also set to emerge as victims of peak smartphone
theory.
Peak smartphone Theory
Last May 2012,
Google (
GOOG) closed out its $12.5 billion acquisition of
Motorola. This deal was largely touted as a defensive move - for patents that
would protect Google's share of Android revenue against litigation. That
following summer, a California jury ordered Samsung to pay $1.05 billion in
damages to Apple to settle patent infringement charges. On September 21, 2012,
Apple stock established an all-time high at $705, before share prices
immediately broke down against a backdrop of a relatively weak iPhone 5 launch.
Earlier this month, Apple cascaded down to a multi-month low at $450, while
The Federal Trade Commission declared that Google should make
its former Motorola patents available to competitors "on fair, reasonable, and
nondiscriminatory terms." Evidence is mounting that the growth of
smartphone market equity already peaked - during Summer
2012.
The smartphone, of course, is now the primary focal point of a
Web 2.0 ecosystem that includes telecommunications, entertainment, audiovisuals,
computing, and tablets. It is inevitable for the Web 2.0 ecosystem to track an
accelerated business cycle of growth, maturity, decline, and bust. For Qualcomm,
the march towards Web 2.0 maturity will also hamper the growth of the
microprocessor market. Chip demand will be a lagging indicator, and Qualcomm is
now running the risk of being saddled with inventory that cannot be sold off -
without steep price discounts. This inventory effectively includes intellectual
property, which may fetch lesser royalty payments due to flagging demand
alongside intensifying competition from the likes of
Nvidia (
NVDA).
According to research firm Wireless Intelligence, 4 billion 3G-4G global
connections will be established by the end of 2016, which is a significant
increase in amount above today's 1.9 billion connections. Going forward,
however, projections for the continued hyper-growth of wireless data
transmissions through 3G and 4G networks may prove to be overly optimistic.
Indeed, popular recording sensation Prince would command Qualcomm investors to
Party Like it's 1999, as an encore to Intel and
Cisco (
CSCO) shareholders before them who also helped drive the
PC and networking growth bandwagon into the ground.
Anything But Apple
Qualcomm
now promotes its Snapdragon processor as its flagship product. The
Snapdragon line is notable for powering rapid download speeds, organizing
multiple applications, and presenting impressive graphics, while still remaining
relatively cool - without a fan. Cooler temperatures preserve battery life for
gaming, taking pictures, surfing the Internet, and taking calls. For
smartphones, the premium Snapdragon S4 processor is now capable of
maintaining up to 1.7 GHz in CPU, displaying graphics in 1080-pixel picture
resolution, and taking pictures through the lens of a 20-megapixel camera
sensor. Beyond smartphones, separate suites of Snapdragon processors also
power tablets and flat panel televisions. The Snapdragon is now the effective
"go to guy," for anybody but Apple, as evidenced by its installation within the
latest premium Samsung Galaxy, Nokia Lumia, and BlackBerry 10 smartphone
lines. At present, Nokia and BlackBerry are literally fighting for survival,
which make their recent product launches all the more important - for both
themselves and Qualcomm's bottom line.
On February 6, 2013, research firm comScore released its latest
report for December 2012 U.S. smartphone market share. The comScore tables
present averages for data taken from the October 2012 to December 2012 quarter.
The Google Android and Apple iOS operating systems now control respective 53.4%
and 36.3% shares of the smartphone market. This duopoly is still
consolidating power, as evidenced by its collective 3% increase in share above
the prior quarter. On the handset side of the ledger, Apple and Samsung headline
this list as the top two original equipment manufacturers operating in the
United States of America. At the bottom of the heap, BlackBerry, Nokia, and
Microsoft Windows are desperately fighting over table scraps while attempting to
preserve small shreds of relevance as telecommunications operators. This is a
game of musical chairs - where Google and Apple already own two out of the three
remaining seats in the room.
For Qualcomm to sustain hyper-growth, it must encourage increased acceptance
of Google Android, BlackBerry 10, and Windows 8 operating systems - largely at
the expense of Apple iOS. Any projections assuming the expansion of Google
Android market share beyond 60%, or even 55%, are unlikely, if not laughable.
Alternatively,
a recent Verge review awards BlackBerry 10 with a solid,
but uninspiring seven out of ten rating. According to
The Verge, the
BlackBerry 10 operating system lacks a "killer app." Without a "killer app,"
BlackBerry 10 may fail to gain traction in the U.S. market. Prospective Qualcomm
investors can confirm a BlackBerry 10 flop, when the company begins hawking
formerly premium Z10 phones at steep discounts in India. Lastly,
Nokia reported that it sold 4.4 million Lumia 920 phones during
its latest quarterly period ended December 31, 2012, which was up from the prior
quarter when the company sold 2.9 million units. This increase in sales is
likely an anomaly, where Nokia leveraged the perfect storm of Holiday Season
timing alongside Apple iPhone 5 supply chain inefficiencies.
The Bottom Line
Over the past six months, Apple, Nokia, and BlackBerry positions have all
been notable for their extreme volatility, as the smartphone market
lurches towards inevitable commoditization, deteriorating profit margins, and
industry consolidation. For Qualcomm shareholders, the rhythmic interplay
between speculators, technology industry journalists, and short sellers is the
canary in the coalmine symptomatic of a stalling mobile device market. As a
supplier, Qualcomm will be last to feel the contagion. Original equipment makers
will be forced to curtail orders for chips and wireless software, as inventories
pile up. Next, intellectual property royalty payments and valuations must be
written down to reflect market saturation and flagging demand. Qualcomm
shareholders should consider quitting while ahead, selling stock, and taking
profits, before this stock degenerates as the latest shoe to drop in the Web 2.0
space.
Wall Street valuations assume that Qualcomm will maintain hyper-growth well
into the near future. On February 21, Qualcomm stock closed out the trading
session at $65. According to Wall Street, Qualcomm is now worth $110 billion in
market capitalization.
For last fiscal year ended September 30, 2012, Qualcomm
reported $6.1 billion in net income. At current levels, Qualcomm trades for
eighteen times trailing earnings. Over the past four years, Qualcomm is
averaging impressive 35% net income growth, despite the fact that diluted
earnings per share collapsed from $1.90 to $0.95 between 2008 and 2009, largely
on special charges. Without this one-time anomaly, Qualcomm averaged 65% annual
diluted EPS growth from 2010 to 2012. Qualcomm is undervalued, only if it were
to maintain growth at this torrid rate.
All great things, of course, must come to an end. The $19.1 billion in
Qualcomm 2012 revenue is classified further into $12.5 billion in equipment and
services and $6.6 billion in licensing. Geographically, the lion's share of
Qualcomm's deals are actually closed out in Asia, as sales in China, South
Korea, and Taiwan accounted for roughly $15 billion, or 80%, of this company's
total $19.1 billion in revenue. Between 2011 and 2012, United States revenue
figures remained nearly flat, while the "other foreign" collective group
declined during this time frame. Qualcomm's bottom line results will deteriorate
rapidly, when China grinds through an inevitable slowdown. Meanwhile, U.S. sales
will remain insignificant, as recent product launches out of Samsung,
BlackBerry, and Nokia have largely failed to capture the imagination of
Americans and dramatically reorder the smartphone marketplace away from
the Apple iPhone platform.
Apple shareholders who stubbornly clung to shares that collapsed from $705 to
$450 within six months would sternly advise Qualcomm cheerleaders to get out
now, while the getting still seems good.
