Slacker, re: Growth prospects- WCDMA / QCOM-
Thanks for taking the time to offer your perspective on QCOM’s QTL / QCT growth prospects.
Re: QTL-
“The ASP for CDMA2000 devices, which of course offer the same possibility for extra functionality and data revenues that WCDMA does, was already around $160 back in the 2nd quarter of 2006. While WCDMA ASP's wont converge with the market average (there will always be low-end GSM), they are going to move decisively lower as the mass market moves to 3G.”
a) True, CDMA2000 ASP’s have declined over the years and are considerably below the ~$200 blended rate. I believe this can be attributed to a couple of things-
…..+ The proportion of sales in the developing world (China / India) has increased significantly, from 15% in 2005 to 33% forecasted for 2009. South East Asia is no doubt proportionally higher, but QCOM’s detail does not breakout these sales separately .
….+ It has been noted that QCOM has been under serious competitive / pressure in India from both the GSM lobby and its influence on government officials resulting in ultra low-cost CDMA handsets. The snip below also suggests that CDMA2000 handsets in China have also been priced competitive v GSM. QCOM has also stated that these competitive pricing initiatives, especially in India, were undertaken to “seed” / speed the market for later upgrades to higher priced / higher functionality devices which will enable internet connectivity, etc.
……..”Completed in August 2006, Yankee Group's study of mobile handset sales in India found that up to 64% of all CDMA2000 handsets sell for less than US$50. The CDMA2000 industry in India continues to offer 22 handsets from 10 suppliers, while the GSM industry offers 17 handsets from 5 suppliers.
The availability of low-cost CDMA2000 handsets is not limited to India. "We see virtually no difference in the cost of entry-level and high-end handsets between GSM and CDMA2000," said Xiaoyu Tong, general manager of China Unicom's”
b) at some point the law of diminishing returns kicks in, making it uneconomical to lower ASP any further.
c) re: “there will always be low-end GSM”.
Modoff forecasts ~ 430 – 391 million GSM handset sales from 2012 thru 2015, roughly 30% of worldwide unit sales. My question remains, --
…………+ with extensively established 3GSM / WCDMA networks in China / India during this period
…………+ The obvious and proven efficiencies enabled by 3GSM – spectrum / capacity / etc
…………+ why would the carriers want to continue the expense of operating a 2GSM network which can only get more costly with age????
…………+ with continued ASP decreases, affordable low / ultra low cost devices, why not dump GSM altogether and go with just dual mode GSM/3GSM (WCDMA) handsets averaging $30 -$50 /unit bearing $1 -$2 QCOM royalty???
…………+ One would think the potential added QCOM royalty revenue of $600 million (chipset sales also???) would be substantially less than the carrier cost to continual to maintain increasingly aging their GSM networks.
Re: QCT
” I do believe that Qualcomm is going to continue gain share for the next couple of years and should move from their current 40% or so of WCDMA chipsets to something above 50%. However, beyond that range, they are going to be fighting a couple of trends.
……. I believe that it is extremely unlikely that Nokia will ever give Q 50% of their business....”
+ Good, IMJ may well be correct in that forecast…. way back when……when some were loudly voicing skepticism .
+ With TXN out of the picture, NOK desiring 2 – 3 baseband suppliers, BRCM still touting its prowess and without even a commercial EDGE product after some 5 years effort, other legacy suppliers struggling--- who you see NOK giving the bulk of their WDCMA baseband business to and why?
+ With the ascendancy of other suppliers in 3GSM/WCDMA (Asians, Apple, GOOG, etc), NOK’s 40% total market share would appear to be further threatened as WCDMA sales ramp. Thus, the Samsung’s / LG’s, etc with well established partnerships with QCOM (and giving virtually 99% CDMA2000 share to QCOM) should be gaining WCDMA share with attendant QCOM chipset share gains.
Fun with some numbers-
………WCDMA Share - #1
………………………Handset……QCOM MSM
………..NOK……….33%.............40%.....................13%
………..Others………67%...........80%.....................54%
……….Total…………………………………………..67%
………WCDMA Share - #2
………………………Handset……QCOM MSM
………..NOK……….33%.............40%.....................13%
………..Others………67%...........75%.....................50%
……….Total…………………………………………..63%
………WCDMA Share - #3
………………………Handset……QCOM MSM
………..NOK……….33%.............40%.....................13%
………..Others………67%...........60%.....................40%
……….Total…………………………………………..53%
Re: QCOM $/share potential
“What does it take to get to ~ $100 / share (about a 15% CAGR for 5 years). And, how can a 15% CAGR be achieved-
Honestly, I had thought you would have been looking for higher returns. I wont argue that 15% isnt possible, only that the bulk of the return is likely to come in the next two years or so.”
+ With current macro economic problems and equity markets in disarray, I doubt things will return to normalcy soon. As I’ve commented before, with “fast trading”, the “investors” have been significantly punished with the markets dominated by traders / speculators resulting in unfriendly territory for Joe Sixpack’s retirement, kid college funds, etc. Prudence says their allocation mix should be significantly rebalanced out of speculative / volatile equities. Thus what was a 50 year S&P500 return of ~10 / year could well be reduced to the 6% range with portfolio rebalancing. Investor expectations should be significantly reduced.
+ WRT QCOM specifically, lower future royalty rates, the law of large numbers, passage of time, higher headcount / OPEX levels have all contributed to lower expectations.
…….hopefully as the robust WCDMA growth slows, the heavy R&D investments (Snapdragon, Gobi, Mirasol, MediaFLO, etc,etc) will be harvested producing significant new revenue streams.
+ The primary thrust of my comments at this year’s ASM suggested that QCOM’s priorities should be directed at achieving at least a 15% long term revenue / EPS CAGR, with corresponding dividend increases along the way.
+ QCOM should be able to achieve a 15% annual return for at least the next 5 years (IMO) with several robust years of WCDMA growth ahead, the many new revenue streams, and increased cost avoidance. If the new revenue streams fail to meet expected results, headcount decreases will be in order reflective of the unwise use of past R&D expenditures / headcount growth.
+ A 15% annual return is nothing to be sneezed at, doubling every 5 years, especially with the expected “market” return potentially shrinking to the 6% range.
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