Qualcomm Boosts WiFi Chipset Business; China Woes Persist - Analyst Blog

Qualcomm Incorporated (QCOM) is facing challenges related to its licensing business in China. Management stated that the company is currently caught in a royalty dispute with a major customer in that country. Moreover, some small companies are still deliberating on a royalty payment as the Chinese regulatory authority, National Development and Reform Commission (NDRC) is yet to come up with its decision on the same. On the other hand, management has taken certain strategic decisions to boost its existing WiFi ecosystem for mobile, computing and networking devices.

Incidentally, few companies are under-reporting the amount of phones sold, for which they should have ideally paid license fees. Meanwhile, the low-end 3G tablets are gaining huge market traction in China. However, tablet developers have an entirely different operating structure compared to smartphone developers in China. To pair up with the former, Qualcomm will have to enter into new licensing agreements with them.

The NDRC is of the opinion that Qualcomm is exercising monopoly power in China. Qualcomm, in defense, has stated that it isn't aware of any activity on its part that violates the anti-monopoly law in China and that it will continue to cooperate with the NDRC. Qualcomm has issued a cautious outlook for fiscal 2015 citing the ongoing licensing business issue in China as a potent factor likely to impact profitability in the near term.

On the bright side, Qualcomm has taken two significant steps to develop advanced WiFi chipsets utilizing the super-fast 60GHz technology. Management holds that these two strategic decisions will completely overhaul the existing WiFi ecosystem for mobile, computing and networking devices. First, the company has acquired Wilocity Ltd., a leading Israeli developer of 60 GHz wireless chipsets based on IEEE 802.11 ad standard, popularly known as WiGig technology. Secondly, Qualcomm is in the process to develop a tri-band platform that will integrate its WiFi technology from the previously acquired Atheros Communications Inc. with the newly acquired WiGig solutions, to significantly enhance the performance of wireless applications.

Qualcomm is the undisputed leader in the global wireless baseband chipset market. At present, the company dominates this market with approximately 66% of revenue share, followed by Mediatek Inc. (15%) and Spreadtrum Communications (5%). Recently, technology research and advisory firm Gartner reported that Qualcomm is the third largest global player in the overall (including mobile handset, laptop and PC) semiconductor market with an estimated 5.5% share, after Intel's 15.4% and Samsung's 9.7%.  

Qualcomm currently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Better-ranked stocks worth considering in this sector include Aruba Networks, Inc. (ARUN), InterDigital, Inc. (IDCC) and ViaSat Inc. (VSAT). All these stocks sport a Zacks Rank #1 (Strong Buy).

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