Sunday, May 4, 2008
[Originally for Sramana Mitra's site]
It has been around six months since I wrote my Qualcomm valuation series. I had at that time valued the company at $44.60. Following the company’s fiscal second quarter 2008 earnings conference call I reviewed its mobile opportunities, strategy and also its product strategy for convergence and mobile computing in my blog. With these as the background, let me revisit Qualcomm’s valuation.
Firstly, there has not been any major event since that will have a negative impact on my $44.60 valuation. On the contrary, the strength of this number comes from the company’s ability to address most if not all segments in the mobile chipset market. It has since made positive strides in new market areas with a comprehensive product portfolio. Besides, the CDMA-pioneer is also betting big on software applications, services and mobile commerce.
Gobi, Qualcomm’s embedded dual-standard chipset for laptops has helped the company gain traction with laptop vendors. Till date five major OEMs are embedding the mobility solution in their laptops. The notebook/laptop market is expected to grow at 10-15% CAGR over the next five years. Though the volumes are not as big as those of mobile phones, Qualcomm stands to gain even with modest penetration. For a more detailed account of Qualcomm’s Gobi moves, I will direct the interested reader to my articles here and here.
Qualcomm also offers the Snapdragon and the Snap Star solutions that, in my opinion, are taking on Intel’s Ultra-mobile PC (UMPC) and Mobile Internet Devices (MID) initiatives. While Intel approaches these convergence initiatives as a reduction in the form-factor and power consumption, Qualcomm has proven competency in building high-performance mobile chipsets. Ms. Mitra in her Apple article on Forbes talked about the ‘yet-to-be created category’ of convergence devices that mobile phone and laptop vendors will scramble to emulate behind Apple. Snapdragon positions Qualcomm to exploit this situation very well. More on Snapdragon can be found here and here.
While it is difficult to quantify Qualcomm’s convergence moves, the upsides are very apparent. For the purpose of valuation, I will take a conservative stance. If I assume that Gobi succeeds in penetrating 20% notebooks in 2012, and the other solutions find slightly lesser success in their segments, I estimate at least a $5.50 increase in Qualcomm’s share price. So, my verdict, based on current information, is $50 per share. As more information trickles in over the next few quarters, I also think that this number will go up.
In summary, Qualcomm has continued to create more value with a very well-thought out and visionary product roadmap and planning into the future. These diversification efforts that I have highlighted in the past will expand the company’s core competency beyond mobile phone chipsets and IP. It also makes Qualcomm more resilient in the eventuality of reversals in some of the various legal disputes that it has been involved in. Finally and perhaps most importantly, the diversification also highlights Qualcomm’s ability to adapt to the changing market needs as it continues to be the flag-bearer for the US wireless industry.