64 Is Qualcomm's Magic Number: Here's Why They're a Buy

Qualcomm , the planet's leading manufacturer of smartphone chips, recently announced the launch of two high-end versions of its iconic Snapdragon processor as part of an ongoing effort to stay ahead of the competition and tighten its existing stranglehold on the global market.

But then, the world of technology is a fast-paced one, and Qualcomm's rivals in the tech industry are unlikely to sit back with their hands folded. This makes it necessary to take stock of the factors likely to work in Qualcomm's favor in the long run. In short, Apple's launch of 64-bit technology in their chips makes Qualcomm a buy. As Intel as Broadcom struggle, look for Qualcomm to establish dominance.

The chip story till now
With 32-bit chip technology being the current standard, Qualcomm's launch of the 64-bit LTE-enabled Snapdragon 808 and 810 processors seems to have been prompted by Apple's launch of its latest iPhone 5s model that has been equipped with an A7 processor -- the one based on the same 64-bit technology. That was something Qualcomm never expected in the first place.

As things stand, Apple's decision to design its own chips has always stood out like a sore thumb in the face of Qualcomm's plans for global dominance. And this is despite the fact that the latter has a staggering 99% share of the global smartphone chip market, as of 2013, with its products being used by almost every other leading handset manufacturer, including Samsung Electronics.

But then, did Apple really derive a big advantage by incorporating a 64-bit chip into its latest iPhone model? Not much, I'm afraid. That's because its newest iPhone doesn't have sufficient memory or RAM to fully utilize the power of such processors, which is true for all currently available smartphones. The 64-bit chip technology also requires an upgrade of the prevailing software platforms, including Google's vastly popular Android operating system. Keeping that in mind, it seems Qualcomm has perfectly timed the launch of its new high-end chipsets that are expected to be a part of 4G LTE-enabled handsets sometime early next year. 

The other side of the story
However, with the high-end smartphone segment nearing saturation in developed regions, Qualcomm is already focusing on making chips for mid- and low-range smartphones that have witnessed a surge in sales in emerging markets such as China and India. And that's one of the reasons Qualcomm launched the Snapdragon 410, the low-end LTE-enabled version of the 64-bit processor, way back in December last year. 

Already the world's largest smartphone market, China's importance to handset makers became apparent when its wireless providers received government approval to upgrade their services based on the 4G LTE network technology. Qualcomm's obvious target was China Mobile, the nation's and also the world's largest wireless carrier in terms of subscriber count. But then, the company was no stranger to China and had earlier faced a major setback in that region.

A pioneer of the CDMA technology that has been the global standard for 3G networks, Qualcomm derives a large part of its revenue as royalty fees from handset makers that make use of its technology. However, with the CDMA network standard proving to be incompatible with China Mobile's indigenously developed TD-SCDMA standard, handset makers operating on its network started to avoid paying royalty fees to Qualcomm creating a major revenue gap.

The opportunity
But now, with China Mobile upgrading its network to the 4G LTE standard, Qualcomm's low-end Snapdragon 410 chipset is set to play a crucial role in the whole story, more so because a majority of the former's subscriber base comprises cost-conscious customers who are likely to opt for budget smartphones. And with less than one-fifth of China Mobile's humongous 775.6 million subscribers using its LTE based services at present, the potential for Qualcomm is not hard to imagine.

The competitive scenario
Qualcomm's dominance in the LTE realm has also helped it to widen the gap with competitors such as Intel and Broadcom, most of whom are still struggling to fully develop their first-generation products in this area.

While Intel continues to be overwhelmingly dependent on the fast-fading PC industry and has a less than 1% share of the global smartphone chip market, it's also currently facing a problem of excess production capacity. Broadcom, on the other hand, is in a relatively better position largely because of its newly introduced M320 and M340 LTE chip products. The company has also managed to record estimate-beating sales and profits during its recent fourth quarter. 

Some Foolish final thoughts
With Apple having introduced a smartphone powered by a 64-bit processor, it's only a matter of time before other handset makers, most of whom are Qualcomm's customers, follow suit. And that makes Qualcomm truly future-ready. With the Snapdragon 410, 808, and 810, the company now has an entire range of 64-bit LTE-enabled chipsets to cater to both the lower as well as the higher ends of the market.

Also, with China Mobile recently announcing plans to offer discounts on LTE-enabled handsets, things are likely to only get better for Qualcomm in that region. This is a company still likely to dominate the LTE realm, at least till the end of this year, not to mention its impressive buyback and dividend scenario. Qualcomm definitely deserves to be among the top five in your current tech portfolio.

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The article 64 Is Qualcomm's Magic Number: Here's Why They're a Buy originally appeared on Fool.com.

Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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