Eclipsing Intel in Market Cap, Now Qualcomm Plans to Handle 1,000-fold Increase in Mobile Data
In the semiconductor-chip industry that’s historic. It’s equivalent to the Congress Party losing an election in India or Barry Bonds winning the career home-run title. Intel had boasted the largest market value of any chip stock for more than a decade. It’s part of the Dow Jones Industrial Average. With its lock on making the microprocessors for the dominant personal computer it seemed positioned to stay on top forever.
Now Qualcomm may be in position to enjoy a long run atop the semiconductor heap. It may even be the new Intel. It occupies a core position in the mobile space that is analogous to that of Intel in PCs. No other company comes close to its market breadth in powering smart-phones, tablets and infrastructure.
Not many semiconductor companies achieve market caps over $100 billion.
Intel is still a far bigger company, with revenue in the past 12 months of $53.75 billion billion. That’s more than double Qualcomm’s $19.1 billion in revenue in the past 12 months. But, with the explosion of smart phone and tablet use, Qualcomm is growing much faster. Intel has been hit by the flattening of PC demand, resulting in a revenue decline in the latest quarter. Its growth should pick up as customers start replacing old PCs with Windows 8 systems from Microsoft (MSFT). But PC growth is never going to resume the torrid pace of the 1990s. Meanwhile, mobile device sales and Qualcomm’s revenue are poised to keep expanding.
Qualcomm doesn’t control the cell phone market the way Intel used to. But it holds a very strong position. Qualcomm sells the baseband chips used in smartphones that are marketed by Apple (AAPL), Samsung Electronics Co., HTC Corp. and other phone makers. It relies on semiconductor foundries like Taiwan Semiconductor Manufacturing Co. (TSM) to make the chips, so it avoids the capital-intensive risk of building its own foundries. Due to its strong patent position, it also collects fees from 195 licensees, spanning most of the cell-phone industry for code-division, multiple-access technology, which is the standard communications technology in cellular networks. In fact, the licensing fees account for most of its profit.
It makes an attractive business model, with R&D rising with earnings and capital spending and overhead a small part of the income statement.
As smart-phone sales rise, Qualcomm’s licensing revenue rises. Mobile computing is exploding faster than any major technology in history. Mobile data traffic has doubled annually in recent years. Despite capacity constraints in a few cities, demand will only expand.
In a presentation at the EmTech MIT conference in Cambridge, Mass., on October 25, Matt Grob, Qualcomm’s chief technology officer, said that the company expects mobile data traffic to grow 1,000 times over the next ten years. He added that based on technology that the company has already demonstrated and some that is still under development, it thinks the wireless industry will be able to handle all that traffic without having to boost user fees.
Grob said that finding that capacity will require three different strategies: increasing the number of antennas in handsets and inside buildings, getting access to little-used and unused spectrum and improving the signal-to-noise ratio of transmissions.
Grob said Qualcomm anticipates putting four or more antennas on each cell phone to improve their ability to send and receive data. It also thinks networks will be designed with many very small cells complementing the normal cells handled by large, expensive base-stations. Some small cells inside buildings would use parts of the bandwidth that don’t penetrate walls. Other, lower bandwidth cells inside buildings could handle traffic from outside on sidewalks or streets. Small cells would be much cheaper than large outside cells that typically cover a radius of 1 km. to 2 km. He joked, each would be “about the cost of a tattoo,” which would be well under $1,000.
Another strategy for accessing more bandwidth is to piggyback on little used spectrum that is currently reserved for military or emergency services use. Grob said that Qualcomm is working on ways to permit shared access to the spectrum that would be automatically ceded to the primary spectrum owner when needed.
Overall, Grob said, Qualcomm expects that the cellular networks will be able to handle the explosion of mobile data implied by a fast-growing population of users around the world, each downloading more and more data. “We think we have a good shot at keeping data service plans at current prices or a little lower,” Grob said.
It is that growth outlook that fans say justifies Qualcomm’s PE ratio of 17, which is about double that of Intel. In the latest 12 months its revenue grew 18% and its earnings per share grew 19%. And its dividend yield is currently 1.6%, while the company is sitting on $3.8 billion in cash.
Bill Bulkeley is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.
Filed under: Company Analysis