- Qualcomm shares have remained depressed for much of the year after the company lost a key Samsung contract
- Qualcomm, however, has some interesting plays coming up, including sale of its UK 4G L-band spectrum
- Qualcomm recently unveiled a technology that allows 4G to run in unlicensed spectrum. The new technology could prove to be a significant game-changer for the company
- Qualcomm's near-term outlook is not too good but its mid and long-term outlook is favorable
Qualcomm (NASDAQ: QCOM) shares have remained in the doldrums this year after the company lost a key Samsung contract for the supply of high-end Snapdragon 810 chips. Qualcomm Stock price is down 15% YTD. However, the general pessimism surrounding the company seems to be overdone. The investing world seems to be overlooking some recent developments at Qualcomm that could turn out to be significant game-changers for the company.
Qualcomm Stock YTD Returns
Qualcomm plans to sell its 4G L-band spectrum in the UK.
Qualcomm recently announced that it plans on selling it 4G L-band spectrum band in the UK. Qualcomm purchased 40MHz (1452MHz-1492MHz) L-band spectrum in the UK for just $12.7 million because 4G technology was still embryonic and it appeared as if it would take many years before 4G/LTE adoption reached appreciable proportions. L-band spectrum can be used to boost 4G download speeds and to ease off congestion in high-density 4G traffic areas.
But 4G/LTE adoption in the UK and around the world has exceeded the wildest expectations and mobile service providers are now looking for ways to cope with 4G traffic surges. 4G/LTE adoption in the UK grew at a blistering 350% in 2014 to reach 15 million connections and was projected to hit the 20% penetration rate mark by early 2015.
Qualcomm happens to be the sole owner of the important L-Band spectrum in the UK. Going by the high demand for 4G spectrum in the country, QCOM could be in for a profit windfall. A 2013 auction of 4G 250MHz in the U.K. realized £2.34B ($3.58 billion). It’s highly unlikely that QCOM had factored in proceeds from the sale when it issued this year’s guidance since the EU only approved sale of the spectrum in May. Since the available band is quite narrow, there won’t be much to go around and I expect competition to be stiff among UK mobile operators. From my own estimates, Qualcomm could end up realizing a profit of $1billion-$1.5 billion from the sale. This could become significantly accretive to QCOM earnings.
Qualcomm Launches MuLTEfire Technology
Qualcomm recently unveiled MuLTEfire, a solution that enables 4G networks to run in unlicensed spectrum. Qualcomm is positioning MuLTEfire as a new take on existing LTE-U, or LTE Unlicensed spectrum as well as LAA, or License-Assisted Access technologies. Qualcomm has played a major role developing both these technologies.
Existing LAA technology requires a licensed spectrum which limits its use to only licensed spectrum holders. MuLTEfire technology, however, can run on unlicensed spectrum making it available to just about everyone. This means that ISPs as well as homes and businesses will be free to use the technology. Then solution looks particularly attractive to small businesses which can run small cell solutions to generate an extra revenue stream while increasing their WiFi coverage. MuLTEfire helps to address the proliferation of mobile data consumption.
Though Qualcomm’s launch of MuLTEfire did not create a lot of buzz among industry insiders perhaps because the technology is still young and its true potential has not yet been properly quantified, chances are high that MuLTEfire will become mainstream sooner rather than later. Qualcomm can benefit from a huge addressable market for MuLTEfire chips and related royalties for the hardware. This could become an entirely new revenue stream for Qualcomm since it relies heavily on MSM chips to drive its top line.
Qualcomm’s existing MSM chip business is a high-revenue low-profit one. The chips brought in 70% of Qualcomm’s revenue but just 23% of its profits during the last quarter. The low margins can be attributed to commoditization of the chips and intense competition from low-cost Chinese manufacturers. MuLTEfire chip margins are likely to be much higher since there are currently no other comparable solutions in the market. I project the new chips to contribute about 10%-15% of Qualcomm’s chip revenues 2-3 years down the line, and 20%-25% five years down the line.
Launch of Monolithic 3G Technology
Qualcomm’s near-term outlook is not bad either. Qualcomm has been losing the battle for Chinese 4G market to MediaTek, supposedly due to the latter’s superior chip technology. UBS analysts told Barrons that MediaTek could see its 4G market share in China shoot up to 46% in the current year from 30% last year. This does not bode well for Qualcomm since China remains its biggest market. With about 1.2 billion mobile subscribers, China mobile users are almost four times as many as those in the U.S.
But Qualcomm plans to launch Monolithic 3D chip technology in 2016 to help address the cost/performance issues it has been grappling with. This should help the company to compete better with the likes of MediaTek in key markets. 4G penetration in China is still low and Qualcomm can use the new chip technology to grab back some of the markets share it has lost to competitors.
Despite its current challenges, Qualcomm has not lost its mojo and is still innovating to maintain its leadership in mobile phone technology. The medium to long-term outlook for Qualcomm looks good. I believe that investors who buy the stock now when it’s beaten down stand to benefit over the long-term.