QCOM’s Earnings Soft – Is The CDMA Monopoly Coming To An End?
Is Qualcomm’s CDMA Monopoly Coming To An End & Will Snapdragon Be Enough To Save QCOM?
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QCOM is an amazing company that is making a major transition and facing headwinds because CDMA is at the end of the product life cycle. QCOM has enjoyed the royalties of being a legal monopoly. The stability of their earnings is changing and how they address that change will determine the next 50% return in the stock (up or down).
QCOM has been a major benefactor of Code Division Multiple Access (CDMA) technology. A big portfolio of patents belong to Qualcomm and they have been receiving royalties based upon Qualcomm’s patented enabling inventions making it possible to apply code division multiple access (CDMA) technology to commercial cellular wireless networks.
Qualcomm owns an extremely valuable patent portfolio that includes patents that are essential, and others that are commercially useful, to all commercial wireless standards based upon CDMA and OFDMA-based systems and standards currently under development. This is where the road gets a little twisted. Everyone wants to be the next Qaulcomm so there is big competition. Every country wants to have a tech company like QCOM based in their country. The fight is on to get people to use their patents.
For many years, QCOM has enjoyed very high profit margins and secure income streams but that maybe nearing the end. Many CDMA operators are supplementing their networks with OFDMA technologies, such as LTE, to deliver advanced mobile applications. This is causing stress to Qualcomm and a stress that QCOM has been well aware of and trying to diversify out of for years. With migration to the new network, Qualcomm has to compete again and win the manufacturers & wireless carriers over to their technology. One big thing QCOM has going for it is the fact that wireless carriers can not switch the whole world over to the new network over night and at once. There will be phones operating on 3G CDMA and 4G CDMA standards depending on where you are in the country. Phones will initially need to operate on 3G CDMA & QCOM will collect a royalty for that even if the carriers decide to go with another technology.
The company is going to allow the usage of both of their technologies for the same price. As long as the carriers use their potfolio of patents for the next generation 4G LTE / OFDMA. QCOM being no stranger to negotiating is in position to collect royalties based on the upgraded network. There is risk here and there is competition causing compression of margins but we should start to see a significant number of announcements and how this turn out shorty.
Most companies that are behind the crest of change are killed and end up in company heaven. One of the companies that QCOM bought back in 2005 was developing LTE base on Flash being an important part of Smartphones and as you may have noticed Apple has so far refused to use Flash in the iPhone & iPad. QCOM has tried a bunch of strategies over the past 15 years and has settled on manufacturing semi-conductors for mobile phones & developing emerging markets for CDMA technology in places like China.
The semi-conductor business is nothing like the CDMA business but I think QCOM will be able to leverage their relationships & eventually become a powerhouse. The challenge for QCOM is if the semi-conductor business will eventually be big enough and profitable enough to offset some of the pressure on margins in the the royalty portion of their revenue and business valuation. Will the growth in the semiconductor business be substantial enough to offset the declines in the CDMA royalties?
They have known about this challenge for a long time and have created some very amazing chips to go into these Smartphones. The monster chips that educated consumers want today are called Snapdragon by Qualcomm. The weak results out this morning are due to the fact QCOM is a new player in the semiconductor business and an old CDMA giant that is nearing the end of its monopoly.
Couple of things to think about and analyze. Do you think the semi-conductor business will be able to offset the CDMA business? How stable are the earnings from semiconductors and if you think those earnings are not as stable as the monopoly, then one should factor in multiple compression. What semi-conductor business is comparable to Qualcomm? What multiple is the right multiple to be used as a good measuring stick to draw insight and information from?
By the way QCOM is one of the first stocks that I ever bought and did analysis on over 10 years ago. I do not own any QCOM now but will buy slowly into weakness. They have a superior chip that is winning recognition in the Smartphone War and I am long the Smartphones Revolution Big Picture.
A possible play could be to go long 4th generation LTE OFDMA patent holders that are competitors of Qualcomm. There are a few and these companies are high flying right now. One is based in the UK and has a good shot in Europe to be the dominate force.
To read a great article published by Qaulcomm on this topic, please click here.
Lets share notes and execution of profitable ways to play this. Your comments are always welcome. South Florida Hedge Fund Managers – Think Local & Invest Global!
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