Qualcomm is facing headwinds this year: royalty share is decreasing, technology prominence in 4G and 5G is soft, customers are building their own application processors and the share price looks quite overvalued compared to certain competitors.
Qualcomm is facing major problems concerning various aspects which will affect its business.
1)Royalties:
First of all, the royalty business is a problem not to be underestimated. Qualcomm's customers like Apple Inc. (NASDAQ:AAPL) are pushing to cut royalties fees related to "old" technologies and it looks like this trend is not over at all. Qualcomm has a rich portfolio in the 3G sector but that is not the same for the 4G and 5G sectors. Indeed, its average royalty rate has been decreasing steadily for seven years. Given that the average smartphone price is currently decreasing, royalties are affected because they are generally priced in relation to retail smartphone prices.
China also is the source of several issues: 1) Chinese OEMs are underreporting orders, 2) Wang Xiang has been hired by Xiaomi, and 3) Chinese companies are increasingly adopting anti-competitive behaviors.
- Exposure toward Samsung and Apple:
Qualcomm has a high exposure to Samsung Electronics Co., Ltd. (OTC:SSNLF) and Apple: the revenues derived from these two companies increased from 38% of 2012 to 49% of 2014, besides which, this supplying share is still rising.
It's obvious that such a heavy reliance is not healthy to Qualcomm because an eventual Samsung and Apple detachment from Qualcomm's products would deeply hit revenues and market share. While other companies implemented and heavily criticized the Snapdragon 810, Samsung has directly skipped this SoC due to overheating problems. Tim McDonough (Qualcomm's VP of Marketing) tried to pour oil on troubled waters, stating that customers have simply overestimated the SD810 overheating issues.
I think that Qualcomm's defense is simply impossible on this matter due to three main reasons:
1.Every SD810 smartphone faced lower battery life compared to the previous models and competitors' phones. Moreover, certain companies had to lower the TDP to achieve better thermal dissipation.
2.Anandtech has shown that the average power consumption of LG Flex 2 SD810 is higher than previous SD805 typical systems and the same goes for power efficiency. It means indeed that SD810 is a very hot and energy consuming SoC, even if other system components must be considered.
3.Every smartphone faces some kind of thermal throttling, but SD810 throttles quite more than competitors. You can see its behavior here.
It is also known that Samsung will probably use both the next SD820 and Exynos (news 1 - news 2) in its high-end offer, but anyhow, it's already clear that Samsung is planning to lower dependence on Qualcomm in the coming years. Obviously, it's not possible to exclude that customers tried to exploit the heat issue to reduce the SoC's price since nearly every customer company loudly complained about it.
Speaking about Apple, the company is succeeding in cutting down Qualcomm's royalties and it will likely reduce its dependence on Qualcomm's baseband chips. It may happen because Apple has the tendency to not massively lean on one single company but it prefers to diversify its supplies. Apple has already been switching from Samsung to Taiwan Semiconductor Manufacturing Company Ltd. (NYSE:TSM), and vice versa, in application processors, but last reports claimed that Apple is stocking up A9 SoCs from both Samsung and TSMC, pushing them to lower prices.
It must not be forgotten that Intel, Samsung and TSMC will have similar node technologies for 10nm production, but Intel will use a 7nm beol for the 7nm node, instead of TSMC which will still use a 10nm beol.
In such a scenario, Intel has the right trump cards to really enter the market and partially steal Qualcomm market share in coming years.
http://seekingalpha.com/article/3514666-qualcomm-will-see-its-soc-market-share-erode-in-the-next-few-years