August 4, 2017 at 5:47 pm #7253
Please post your member valuations of Qualcomm here for 1 FREE MONTH from Framework Investing! We will use only completed models with all valuation drivers complete and your rationale placed in notes within the model.
For all you MAC users out there, this will be a problem unless you are running VM Ware Fusion or Parallels. Either of those two solutions will allow you run a full Windows machine easily, safely and without interruption inside your MAC. Questions, contact Joe as he does this all the time.August 26, 2017 at 1:40 am #7439
Here are some of the main points of our discussion of Qualcomm (QCOM). You can also read my post in the Research section of the site here: https://frameworkinvesting.com/qualcomm-qcom-model-notes/
1. Qualcomm is a provider of technology enabling mobile telephony. It is a “fabless” chipmaker (i.e., it designs chips, then works with a foundry like Taiwan Semiconductor, to get them built), so its capital needs are modest. It also licenses its intellectual property (IP). The company's largest segments are QCT – the chipmaking segment – and QTL – the IP licensing segment. QCT generates roughly twice the revenue of QTL and total revenues are around $25 billion.
2. The company holds key patents in CDMA and OFDMA radio transmission technology. CDMA and its variants form the backbone of “3G” technologies, and OFDMA is the basis for the LTE “4G” wireless system. Any mobile phone maker that wants to connect to a 3G or 4G network needs to pay Qualcomm something – either for its chips or for its IP.
3. The demand environment for smartphones is maturing. Developed markets are already saturated, and roughly 70% of phones sold in developing economies are smartphones as well. Qualcomm extract license payments based on the price of the phone rather than the volume of phones produced, and this has cause a legal dispute with Apple (AAPL) – see below. We hypothesize that one element of Qualcomm's revenue dynamics come from slowing in the volume of phones produced and a reduction in the average selling price of phones (due to increasing penetration into emerging markets). Other issues include a cyclical component caused by new product introductions (e.g., iPhone 8) and competition from other chipmakers (e.g., Intel).
4. Qualcomm / Apple Battle: Apple maintains that its customers pay more money for its phone because of the features unique to its design; as such, Qualcomm should not be entitled to value created because of Apple's iPhone designs, but on the basis of the technology it enables. Apple has withheld royalty payments to its 3rd party manufacturers and Qualcomm has filed suit to bar certain iPhones from import into the US. Qualcomm has also refused to release rebate payments to Apple. All of this affects the QTL licensing business.
Qualcomm originally supplied all of a certain type of chip to Apple, but starting in 2016, Apple shifted some of its chip orders to Intel. This cut revenues to Qualcomm's QCT chipmaking business. Apple, now locked in a legal dispute with Qualcomm, has moved more of its chip orders to Intel. https://www.i4u.com/2017/06/123207/apple-use-intel-chips-instead-qualcomm-iphone-8
In 2015, revenues from Apple represented roughly 20% of Qualcomm's total revenues and Samsung, 25%. In 2016, revenues from Samsung stayed stable at around 25%, but revenues from Apple fell to 16% of total and revenues fell by 7% overall.
5. Qualcomm has agreed to buy European chipmaker NXP (NXPI) for a total enterprise value of around $40 billion. NXP's revenue run-rate is around $10 billion a year after the 2015 acquisition of Freescale Semiconductor, a US producer originally part of Motorola. You can read my notes about these companies, and download models for them from the Research section, here: https://frameworkinvesting.com/qualcomm-background-nxp-freescale-models/
A) Mobile telephony demand dynamics. We'd like to collect at least 10 years of data – 20 years would probably be better – about the number of chips shipped by Qualcomm's QCT segment (information in the Management Discussion and Analysis section of the QCOM 10-K) and the revenues of licensees that pay into Qualcomm's QTL segment.
B) It would be nice to have an overlay of Apple and Samsung phone introductions to see how the release schedule of new high-end phones (e.g., iPhone 7 versus Galaxy 7) affects Qualcomm's revenues. This information can probably be gained from Wikipedia and overlaid on the Framework Model.
C) Qualcomm made fairly large acquisitions in 2011 and 2015. In 2011, revenues grew sharply; in 2015, revenues fell. We'd like to know more about what those acquisitions were and what effect, if any, they had in revenue growth during the year of acquisition and the next. This information should be available in the 10-K and from public sources.
D) We've started looking at the demand environment for NXP. It would be nice to know who its largest customers are (both for the European business and for Freescale). Some of this information may be in the presentations I uploaded on the NXP post mentioned above. Some may be able to be found in NXP's annual reports (called “20-F” forms because NXP is a “foreign filer” in the US) and in Freescale's 10-Ks (copies of which are available on the NXP Investor Relations site).September 5, 2017 at 3:22 pm #7515
Update to Qualcomm Valuation Work
We met on 9/1/2017 to pull together a rough valuation for Qualcomm's legacy mobile phone business, then combine that with our previous rough valuation of NXP's legacy business to find a Sum-of-the-Parts (SOTP) valuation for the combined entity.
The models with our valuation work in them are here:
- Qualcomm's present market cap is somewhat below must of our valuations for its present business and considerably lower than most of the scenarios after it is combined with NXP.
- Qualcomm's mobile phone chip/IP franchise is sensitive to worsening industry dynamics. Qualcomm is under increased competitive pressure and is a generally disliked firm within the mobile telephony ecosystem. We understand that thinking more carefully about that dynamic will be important to our valuation.
- Several members asked the question “What right does Qualcomm have to win in the IoT / automotive chipset space?” In general, we need to consider the degree to which synergies between Qualcomm and NXP can be realized and what factors regarding industry penetration and corporate culture make realizing synergies more difficult.
- While not a “lay-up” our initial rough SOTP valuation suggests this is an investment opportunity worth analyzing more closely.
In addition to the lettered questions in the update poste above, Carey C. raised a good question about whether or not Qualcomm technology underpins 5G technology. 5G is due out in 2019, and if Qualcomm's IP is not a part of the 5G standard, the value of its mobile telephony business will be much lower. As such, one other task we'll need to do is to find out how Qualcomm is positioned for 5G.
In another Office Hour session after the one linked above Robert H. and I set the structural growth rate of Qualcomm to -100% to see what value the company would have if its IP was worked around by the industry. This was an interesting exercise and other members are encouraged to try it for themselves.November 3, 2017 at 7:44 pm #7878
This Qualcomm trade might work out faster than expected!
There is news that Broadcom is interested in buying them.November 4, 2017 at 3:46 am #7890
I saw this news today… $100 billion… That's a hefty price tag! Thanks for the link!November 6, 2017 at 3:05 pm #7895
There is a good chance QCOM's board might reject the offer for being to low or the government might block any deal on anti-trust concerns.
Would it make sense to lock in any gains here and use calls to participate on the upside?
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