How Have Apple and Samsung Contributed to Qualcomm’s Split?
Qualcomm Finally Succumbs to Jana Partners' Pressure to Split
Apple and Samsung account for almost 85% of mobile shipments
In its fiscal 3Q15 earnings call, Qualcomm’s (QCOM) CEO Steven Mollenkopf stated that “The current industry environment has seen OEM share shift in the highly profitable premium tier, where the top player continues to take share and where, according to IDC, the top two manufacturers together now have more than 85% share of premium tier shipments.”
Here, the top two manufacturers are Apple (AAPL) and Samsung (SSNLF). According to the IDC (International Data Corporation), they commanded an ~43% market share of the global smartphone space, as the above chart shows. According to a report from the Wall Street Journal, citing Canaccord Genuity managing director T. Michael Walkley, Apple accounted for 92% of the industry’s operating profits in 1Q15.
With a market capitalization of ~$100 billion, Qualcomm’s name has become synonymous with mobile and mobile network communications. It generates the majority of its revenue from the chips that are used in mobile phones. Any deal with Apple or Samsung, who are leaders in this space, would generate significant revenue for Qualcomm.
High inventory buildup and low new order demand
In April 2015, the Wall Street Journal reported that Samsung—a Qualcomm customer since 2011—has started using its own in-house processor for the new Galaxy S6 smartphone instead of Qualcomm’s Snapdragon processor.
In contrast, Apple designs its own processor for the iPhone and iPad. It buys baseband modems from Qualcomm. They don’t generate significant margins.
As iPhones and the Galaxy phones continue to find preference among users, Samsung is left with no other alternative but to go for the lower end of the market. Low-end vendors are piled up with high inventory and low new order demand. Due to this situation, Qualcomm’s CFO George Davis said, “This dynamic led to inventory build in the fiscal third quarter for these OEMs, which is driving reduced demand for our chipsets in the near term on inventory drawdown.”
You can consider investing in the SPDR S&P 500 ETF (SPY) and the Technology Select Sector SPDR ETF (XLK) to gain exposure to Qualcomm. The stock accounts for 0.57% and 2.58% of the portfolios, respectively.
Browse this series on Market Realist:
