Investors Hang Up On Qualcomm

By Eugene Bukoveczky | April 20, 2010 AAA

Looks like the runaway popularity of Apple's (Nasdaq:AAPL) iPhone is continuing to take a serious bite out of the competition.

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Shares Nosedive on Weak Outlook
Recently, mobile handset chip maker Qualcomm (Nasdaq:QCOM) saw its share price plunge more than 8% following the release of earnings and revenue guidance for the next quarter then fell short of analyst's expectations. After reporting expectation-topping earnings of 59 cents per share during the current quarter, Qualcomm now expects earnings for the next quarter to fall into the 51 to 55 cent a share range. (Learn about the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

As the world's biggest maker of cell phone chips, the bulk of Qualcomm's profits comes from fees paid to it by mobile phone handset makers that incorporate Qualcomm's chips. Under such arrangements, the amount of revenue Qualcomm gets is tied to the final selling price of the handset. Korean electronics giants Samsung Electronics and LG Electronics are among the company's larger clients.

Competing Smartphone Makers Losing Ground To The iPhone
As snappy as some of the new smartphone handsets made by Samsung and LG are these days, their appeal appears to be eclipsed by the apparently irresistible tech-cachet of owning an iPhone. That desire is reducing the sales of these competing products, and also lowering their prices producing a double-whammy effect to Qualcomm's bottom line. And average prices for these new handsets are expected to continue trending lower for the foreseeable future.

With global sales of smartphones now expected to grow by 46% - four times the rate of the overall handset market - a loss of competitive edge in this arena can have a serious impact on future profitability.

Google's Android Phones Can Be iPhone Killers
If there a chance that Qualcomm can maintain its profit momentum in the current environment, it lies with the company's Snapdragon processor, a higher margin product that now has found a home in new line of smartphones sporting Google's (Nasdaq:GOOG) Android operating system. Manufactured by China's HTC and carried by Verizon (NYSE:VZ), the handsets have gotten rave revues by tech pundits, who have claimed that they come close to rivaling the iPhone's elegance. However, with only 38,000 applications available for download, Google's Android offering is still miles behind Apple's massive library of 185,000 apps.

The Bottom Line
If Google's Android offering turns out to be the iPhone killer that everyone seems to be hoping for, then Qualcomm will be one of the clear winners in that scenario. But with recent numbers from Apple showing no letup in the overwhelming demand for the iPhone, the odds that anyone can steal Apple's momentum in this market are getting longer by the day. (For related reading, take a look at 6 Professional Apps Worth Buying.)

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