Qualcomm, Inc. (NASDAQ:QCOM) was flying in 2016. At least it was if you looked at Qualcomm stock, which gained nearly 30% over the course of the year. That performance was despite some troubling financial indicators and growing competition. However, QCOM is down 13% since the start of 2017 in a sign that the challenges are getting harder to ignore. With that in mind, just how ugly is this situation?
The gains made by Qualcomm stock in 2016 seem out of sync with its financial performance. For fiscal 2016, the company saw revenue drop 7% compared to the previous year. Net income was off even more, dropping by 13% year-over-year.
QCOM and Competition From Intel
Intel Corporation (NASDAQ:INTC) has been fighting its own battle on the mobile front and one of its solutions had a real impact on QCOM in 2016. The company made inroads with its modems in 2016, including scoring the coup of displacing Qualcomm modems in many of Apple Inc.’s (NASDAQ:AAPL) iPhone 7 smartphones. Intel also has ambitions of competing against QCOM on the mobile processor front, and in 2016, it licensed ARM chip manufacturing capability from ARM Holdings.
While QCOM’s Snapdragon chips remain the CPU of choice among smartphone manufacturers, there’s a growing movement toward going at it on their own. Apple pioneered this strategy with its iPhones, using its own ARM-based AX chips. Samsung Electronics Co Ltd (OTCMKTS:SSNLF) also began designing its own ARM-based chips, the Exynos series. It typically uses the Exynos chips in Asian versions of its Galaxy smartphones, but could conceivably replace QCOM’s Snapdragon altogether in its lineup if it chose to do so.
Smartphone manufacturers can stand out from the crowd and customize their devices by designing their own chips. That’s a trend that’s already in place with the two smartphone giants — Apple and Samsung — and as it trickles down to other manufacturers, it will pose a threat to the dominance of Qualcomm’s Snapdragon.
FTC and The Apple Lawsuit
Adding to the pressure on Qualcomm are legal troubles. The Federal Trade Commission filed anti-trust charges against QCOM in January over the company’s technology licensing practices.
Following the FTC move, Apple launched a $1 billion lawsuit against QCOM. The outcome of the suits could be expensive and besides any fines and damages — it was forced to cough up a $975 million fine in 2015 after the Chinese government went after it for similar issues — the outcome could have an impact on future revenue.
QCOM Just Announced a New Gigabit LTE Modem, But…
Qualcomm announced a new Gigabit LTE Snapdragon modem on Feb. 21. This new chip gives smartphones broadband-class wireless internet speeds. Great news for a company looking for some positive press for a change.
Samsung rained on its parade just two days later with the announcement of a new Exynos 9 Series 8895 mobile CPU. Not only does the new Exynos chip use the same advanced 10nm process of Qualcomm’s latest Snapdragon 835 flagship mobile CPU (resulting in big performance and power use gains), the Exynos 9 incorporates an embedded Gigabit LTE modem.
The Snapdragon modem is capable of slightly faster (theoretical) maximum speeds than the one embedded in Samsung’s CPU, but it’s just the latest sign that Qualcomm mobile technology is no longer automatically the best in the room.
QCOM isn’t going anywhere, despite what is shaping up to be a challenging year; however, investors are unlikely to give Qualcomm stock the free pass that they did in 2016.
The slump so far in 2017 reflects the reality of the situation. If the numbers don’t add up, the legal messes aren’t settled or more former customers ditch Snapdragon chips for their own custom solutions, QCOM seems unlikely to recover to 2016-level highs any time soon.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.