Wall Street landed a few blows on Qualcomm, Inc. (QCOM) last week for scaling back its near-term global device shipment targets during its first-quarter earnings call.
Apple Inc. (AAPL) got caught in the crossfire too, falling 1% on continued concerns of a slowdown in smartphone sales. But after listening to the QCOM call, I realized that the weakness in the smartphone supply chain may not be as big a drag on AAPL’s margins as some seem to think.
AAPL, QCOM and Smartphone Questions
Qualcomm stock shareholders shuddered to hear the company warn that mobile station modem (MSM) chip shipments in the current quarter are tracking 13%-22% below last year’s levels. Since these MSM chips are used in higher-end phones, it’s no surprise that smartphone sales have been downtrending.
And because Samsung (SSNLF) and AAPL dominate the high end of that market, weakness for QCOM raises questions around the manufacturers. After all, it’s hard to reconcile a two-digit drop in component shipments with continued strength for the companies that need those chips to sell phones.
But while management wasn’t exactly eager to name names during the earnings call, it was easy to read between the lines. CEO Steven Mollenkopf told us that one “premium-tier ecosystem” has slowed its upgrade ramp. That’s obviously AAPL, where less intensive innovation through the iPhone 6 cycle has curbed consumers’ appetite to buy an incrementally better phone ahead of the iPhone 7 launch.
Mollenkopf also admitted that AAPL’s slowing ramp triggered a “slight” downturn in QCOM’s global shipment numbers, but we knew about that already. We can see the sales trend written on the Apple stock chart itself: down more than 4% in the fourth quarter of 2015.
And yet, management was relatively cheery throughout the call, talking about how QCOM’s product mix was moving toward smaller volumes of more powerful chips for higher-end phones. Overall, the company is becoming less of a mass-market supplier and increasingly allied to manufacturers that focus on big price points and ultimately more profitable devices. That’s the AAPL strategy at its core.
The real elephant in the room is its other major customer, Samsung, which QCOM admits is creating “a significant delta” in the year-over-year trends.
That’s actually not a shock: Samsung opted about a year ago to swap its own chips into the sockets QCOM previously filled, taking its phones out of the equation. While a few Galaxy models have added QCOM back into the build, the absence of that huge slice of the smartphone universe is probably the factor prompting the double-digit MSM chip decline.
But none of that is a red flag for AAPL. The smartphone universe is not collapsing, as far as QCOM can see. Overall volumes are cooling a little — the company now expects 4% to 10% growth in global phone sales this year, down from a 7% to 13% target three months ago — but there’s no cliff in those numbers.
Smartphones have been a tale of two markets for years now. There’s AAPL and Samsung sharing the high end, and then there’s everyone else.
QCOM lost one of those partners on the high end, so we should expect some erosion there.
But the next generation of iPhones will hit consumers soon enough, and both Apple stock and Qualcomm stock will continue to surge forward as they have been.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
