Qualcomm vs. Intel in Mobile Chips: Somebody’s About to Get Hurt
Trash-talk between Qualcomm (QCOM) and Intel (INTC) investors notched up several decibels in recent days, which probably means there’s reason to worry about both companies. Piper Jaffray mocks Intel’s products. Citigroup disses Qualcomm’s supply chain. Somebody’s about to get hurt.
Both companies make processors for cell phones and tablets, the fast-growing industry that’s every chip makers’ holy grail. Qualcomm has traditionally whipped Intel’s butt in this arena – it makes the vast majority of processors for 3G and 4G phones and leaves the PC market to Intel – but Intel is finally out with a competitive chip and a stable production stream that give its backers hope for a piece of mobile action.
Any ground Qualcomm loses to Intel will lead investors to wonder whether the strong earnings gains that have supported its share price recently can continue. Any failure by Intel to make a solid break into Qualcomm’s market share will cause its shareholders to wonder if there’s much future in a company stuck in the slower, lower-margin PC business. It’s hard to tell which side is more worried now.
Piper Jaffray analyst Gus Richard argues that problems with Qualcomm’s supply chain – problems that helped drop its share price about 7% over two days last month – are overblown. Richard believes the fixes Qualcomm is trying (mainly, adding suppliers) will lead to even higher than forecast profits in 2013. Moreover, he believes Qualcomm makes products that wireless device companies will continue to prefer over anything Intel makes. He considers Intel comments about supply chain issues fear-mongering “to obscure their own shortcomings.” He is not impressed with Ultrabooks, a laptop/tablet hybrid Intel is banking on for stealing iPad sales.
And really, Qualcomm’s bottom line looks just fine. YCharts Pro gives it strong marks for fundamentals and average marks for share price value. Its revenues and earnings growth in the past three years is particularly impressive for a $104 billion market cap company.
Citigroup’s (C) Glen Yeung, on the other hand, writes that Intel stands to benefit from the current shortage of manufacturing capacity for a long time. Intel acts as its own foundry and doesn’t have to wait in line with Apple (AAPL) and Qualcomm and other chip makers at factories that have orders than they can fill expediently. He even suggests Intel might take on some small foundry contracts to make parts for other chip makers.
Intel, with a market cap of $132.4 billion, hasn’t had near the revenue and profit gains in the past year that Qualcomm has racked up. Then again, Intel’s share price doesn’t rely on them. Intel shares have risen more over one and three years in part because they pay dividends worth noticing. Intel’s dividend yield is just over 3% while Qualcomm’s is about half that.
Qualcomm’s dominance in a high-growth business means it continues to collect premium prices for its shares. Intel’s price/earnings ratios were particularly low last year when pundits were predicting the imminent decline of the PC market. But they were wrong; PC sales rallied in the first quarter.
Right now, Qualcomm seems to have less to gain and more to lose in this fight. For the moment, the PC business that Intel rules is padding its earnings just fine. Long term, though, Intel needs a success in Qualcomm’s market, and Qualcomm needs to maintain its dominance. Someone is going to end up crying.