Will Google partnership be the next growth driver for Qualcomm?
The stockholders of leading mobile chipmaker Qualcomm (NSDQ:QCOM) are a happy lot; QCOM stock delivered an impressive return of 35.16% YTD and a return of 28.2% in last 6 months alone. To keep up the pace going into 2017 Qualcomm announced some major collaborations, giving an idea of the growth prospects ahead of it. However, recently JP Morgan downgraded QCOM stock to neutral from overweight. The question now arises whether there is still any major upside left for Qualcomm stock. How are the growth prospects and trends for Qualcomm in the year ahead? Will Qualcomm stock replicate its extraordinary performance in 2017? Let's take a closer look.Analysing Qualcomm's Recent Collaborations
Qualcomm recently announced that it will work with Google to combine Android Things, an Internet of things operating system, and its Snapdragon processor. This move may allow it a larger role play in smart home, smart city deployment projects of Google. If the collaboration is successful, Android will be embedded with the processors in the IoT food chain. To have a wider reach in the IoT segment, Qualcomm's ARM processors also work on Microsoft's Windows 10 IoT. But it remains to be seen whether the operating system in the IoT food chain will really matter.
The acquisition of NXP Semiconductor (NSDQ:NXPI) has opened up multi-billion dollar connected devices market from smartphone to car to home, for Qualcomm. It seems prepared to cater to the massive connected devices market in terms of OS preference with Android and Windows 10 mobile collaborations. Though Amazon and its AWS have different take on cloud and IoT devices with its Greengrass solution which revolves around the cloud and aggregation of sensors.
Here Qualcomm and Google both can gain big if they are successful in connecting Android Things to Google Cloud. All these developments in the IoT space only enhance the probability of it becoming a dominant player in the IOT hardware space going forward.
Qualcomm is also partnering with Microsoft to deliver full Windows 10 experience to computers (called the cellular PCs) running on its Snapdragon chips. This partnership offers the biggest smartphone chip maker an entry into tablets and laptops market which have been Intel's (NSDQ:INTC) stronghold. Particularly the high priced mobile computers purchased by many enterprises presents a lucrative market to Qualcomm, even though the volumes are less than phones.
Also, this partnership will bring added compatibility with applications developed for PCs which previously have never worked on Qualcomm-powered hardware. If Microsoft and Qualcomm get it right here, then Qualcomm may hit Intel hard making inroads into Intel stronghold zones.Is Analyst Downgrade a Reason to Worry?
Qualcomm Inc. was downgraded to neutral from overweight at J.P. Morgan, as analyst Rod Hall sees better opportunities elsewhere and a negative environment for global consumers. In his thesis to downgrade Qualcomm he stated reasons such as the company’s resolution of its dispute with Chinese regulators, its announced purchase of NXP Semiconductors, the shares being fully valued and the consumer outlook not being so great for 2017. According to him, mixed consumer environment might lead to smartphone sales underperforming in the first half of 2017.
If we take mixed consumer environment as the main reason for the downgrade then not only Qualcomm, everyone from the manufacturing sector would be hit. Although this is only a forecast from one analyst, the average analyst consensus is still bullish on Qualcomm. Also, the general market perception related to Qualcomm still remains bullish if we go by the chart below from Stocktwits.
Even if there is a major slowdown in smartphone sales, Qualcomm with its latest collaborations and impending acquisition of NXP semiconductors which is expected to be closed by the end of 2017 has its sources of revenues diversified. Even if there is a correction in price going ahead in 2017, we believe it would not be a massive one and may be temporary as there are more strong reasons to be bullish on Qualcomm than be bearish.Future Outlook
Qualcomm has been affected by slowing smartphone sales but it is looking for long-term growth drivers. The pending acquisition of NXP Semiconductors would open up the automotive chip market worth $38 billion in 2019 for Qualcomm. Qualcomm’s top line is projected to increase by 40% going forward as it will have access to an end-market that is expected to be worth $138 billion, including the Internet of Things.
It is also expanding its horizon with its latest collaborations as discussed above and new products like Centriq 2400 processor, a chip it plans to sell for server systems, attacking Intel's most lucrative stronghold. Servers are an attractive market for chip makers because their processors command higher prices and profit margins. This chip is expected to come to market in the second half of 2017. The product is expected to be available broadly in the second half of 2017.
Qualcomm's entry into server market is seen as a healthy move for the industry. Although other noted firms like AMD (NSDQ:AMD) have failed to challenge Intel in this segment, the company is confident of the benefits of its ARM architecture and is hopeful of catering to the needs of the ever-growing data center industry in the near future. Also, Qualcomm is an experienced player in the ARM business and has sufficient resources for R&D.
Fellow Amigobulls author Piyush gives you some more reasons to believe it's a great time to be bullish on Qualcomm Stock in his recent article.Putting It All Together
Qualcomm is aggressively investing in the IoT segment and other chip segments like chips for server systems where it has no presence whatsoever. Slowly, but steadily it is diversifying its portfolio and reducing its dependence on mobile chips for revenues. The average annual estimated earnings growth of 10.50% for the next five years is also high. Any slowdown in business for Qualcomm would be temporary, so any pullbacks in QCOM stock should be treated as a good buying opportunity. Given Qualcomm's new collaborations and product line up, it is reasonable to continue holding the stock for the long run and go long on pullbacks.
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