E2242 - Qualcomm - October 19, 2022
Wrapping up our chip segment with Qualcomm. Next week: Netflix
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Qualcomm
This week we discussed Qualcomm. You may not realize it, but you are a downstream customer of Qualcomm because they get royalties on practically every mobile phone in the world.
Qualcomm is known for pioneering CDMA technology. This CDMA technology, interestingly, had its roots in a patent that was donated to the US government by its authors (an actress1 and a musician2) during World War II. The patent was for a system which enabled sending encrypted messages to torpedoes to circumvent traditional methods of signal jamming - the concept, known as ‘frequency hopping’ broke the conventional mold of communicating over a single frequency. Ultimately, this patent was the genesis for spread spectrum technology and eventually CDMA, which Qualcomm invented and pioneered.
Qualcomm’s CDMA technology enabled low power, efficient, digital, and secure communication. It was easily an order of magnitude better than the existing technology, so the company quickly disrupted the industry. This expertise in digital signal transmission translated well to developing low power consumption chips for mobile phones, for which Qualcomm utilizes ARM architecture and is ARM’s largest customer. Interestingly, and as discussed on the podcast today, ARM is suing Qualcomm - read more on that from FT.
Today, Qualcomm’s business model boils down to collecting licensing royalties for the intellectual property portfolio which makes mobile communication possible and selling chipsets for use in mobile phones and other devices. As a result, nearly every mobile phone produced generates revenue for Qualcomm - even if it doesn’t have a Qualcomm chipset or modem.
Key Risks
Customer Concentration - Over time, the smartphone business has consolidated and as a result, Qualcomm is dependent on a relatively small number of customers which each make up a large percentage of their revenue. Back in 2019, Apple, Qualcomm’s largest customer, settled a dispute with Qualcomm over their modem licensing, but litigation continues.
China Risk - China has unilaterally renegotiated ARM licensing fees on behalf of the Chinese companies subject to them as recently as 2015. This could be one way in which China strikes back at the US in retaliation for the semiconductor sanctions discussed in previous weeks
Smartphone Market Growth - Qualcomm’s cashflow is highly indexed to global smartphone shipments which have plateaued over the past few years. New growth seems to be mostly indexed to new product developments.
Valuation
Other Market Data
Here is a comparison of the Qualcomm and some of the other companies we’ve discussed, and a few charts on the smartphone market….
Supplemental Data
1 SuperCompounders
2 Macro
China Abruptly Delays GDP Release During Communist Party Conference (WSJ)
3 Energy
3.1 Oil & Gas
3.2 Metals Powered
4 Tech
Intel's Mobileye Reportedly Mulling Substantially Lower IPO Value (CNET)
Cloud Multiples - Check out the most recent edition of Clouded Judgement for the latest SaaS multiples.
Semiconductors
Semiconductor Industry Association Global Billings Report
Bureau of Economic Analysis Semiconductor Import / Export
Cryptocurrency
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The actress, Hedy Lamarr, according to IMDB, is regarded by as the most beautiful woman ever to appear in films. She is known for Samson and Delilah (1949), Dishonored Lady (1947) The Strange Woman (1946), Her Highness and the Bellboy (1945), and Ecstasy (1933) among others.
George Antheil was a composer and pianist. He wrote music for films, which is how he got connected to Hedy Lamarr, and numerous compositions ranging from symphonies to piano sonatas.