Chipset manufacturer Qualcomm Inc. (NASDAQ: QCOM) faced some seemingly devastating news after close on Wednesday after revealing that Apple (NASDAQ: AAPL), the biggest smartphone maker in the world, would be abandoning its modems in favor of Intel’s (NASDAQ: INTC).
The news comes in on the heels of a contentious legal battle between Apple and Qualcomm, with the former refusing to pay the latter’s pricey licensing agreements, consequently challenging several of the chipmaker’s key patents.
As part of that ongoing legal dispute, Apple has been weaning itself off Qualcomm’s chipsets for months, and now the smartphone giant is finally ready to cut ties with its rising adversary.
Yet you might be surprised to hear that following this seemingly bearish news for Qualcomm, the company’s stock actually spiked upwards of 6% on Thursday, while Intel was trading in the red. Investors, it seems, have discounted the value of Apple’s current modem business to these chipmakers entirely.
The market, of course, is never oblivious to such major developments in high-profile industries, so what exactly was it that swayed trading in Qualcomm’s favor this week? Well, there are a few answers to that question, none of which spell good news for Apple.
To start, Qualcomm also announced on Wednesday that it would be pulling out of a proposed $44 billion acquisition of Dutch chipmaker NXP Semiconductors (NASDAQ: NXPI) after failing to receive regulatory approval from China. Instead, the company will be pursuing a more immediately-shareholder-friendly move: a share buyback up to $30 billion.
Further, the firm managed to crush analyst earnings estimates by 42% during its most recent quarter, with EPS coming in at $1.01 a share. Revenue was also above consensus by 14%, marking a $400 million beat.
While Qualcomm did continue to lose business from Apple during the period, it was able to post a top-to-bottom beat regardless, as the losses were more than offset by surging business from Chinese device makers. Those companies went unnamed in Qualcomm’s official statements, but it’s clear that we’re talking about the likes of Xiaomi, Huawei, and Oppo.
According to the most recent data from IDC, Huawei, Xiaomi, and Oppo together now control 24.8% of the global smartphone market, up from 21.2% one year prior. Combined, these rising Chinese smartphone giants now easily eclipse Apple’s share of 19.7%.
The rise of Chinese smartphone makers in recent years highlights not just a point of reduced risk for chipmakers like Qualcomm but also a growing threat to Apple’s longtime dominance and directional sway in the smartphone market. The same way Ford, once a pioneer in the auto market, eventually ceded dominance to Japanese and German competition, Apple now faces the very same threat from China and South Korea as it pertains to mobile devices.
It’s no revelation to point out that, for years now, the market has watched Apple’s culture of innovation stagnate as the industry approaches what we can refer to as a kind of smartphone parity. There are only so many new and exciting features you can add to a smartphone before implementing near-meaningless changes (e.g. the removal of a headphone jack).
In some cases, the gap between Apple the innovator and Asian “knock-offs” has even reversed. Apple was beaten in the race to wireless charging, OLED screens, and a number of other technological developments that have already taken place in the consumer electronics arena.
That’s not to say Apple doesn’t have an ace up its sleeve, of course. Rumors are still flying that the company plans to reveal some kind of augmented reality device as soon as next year. But as things currently stand, it’s safe to say that Apple’s claim to the consumer electronics throne can be called into question.
In a sense, Apple may be cutting off its own nose to spite its face here, as it plays hardball and challenges Qualcomm’s intellectual property on modems. As research from wireless signal testing firm Cellular Insights pointed out late last year, iPhone X models equipped with Qualcomm’s modems get “consistently better speeds” than those equipped with Intel’s modems.
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That speed difference, mind you, is quite dramatic. As Cellular Insights found, Qualcomm modems experienced 67% faster LTE download speeds than Intel modems, on average, in weaker signal conditions.
The risk is obvious here, as Apple will be relying on second-tier Intel as a sole supplier, unless it is successful in developing its own modems. That will likely prove difficult, though, as Qualcomm is already way ahead of the competition, having revealed its updated 5G modems this week.
Those modems notably mark the first available 5G chipsets small enough to fit into mobile devices, and they come right on the heels of 5G standard completion last month. Apple’s reluctance to do business with Qualcomm means it will be one of the only smartphone makers not to get 5G capability in the first half of next year.
In fact, it’s well understood that Apple won’t be revealing phones with 5G capability until 2020 at the earliest. Meanwhile, LG, HTC, Oppo, Vivo, and Xiaomi have all committed to offering 5G-enabled phones by the end of 2019. Huawei and Samsung are also expected to reveal 5G phones as early as January of next year.
With Qualcomm having an undisputed monopoly on mobile-ready 5G chipsets, the company and its investors are obviously in an incredibly strong position, while Apple’s future remains less certain.
That said, the release of 5G-enabled smartphones should be regarded as Phase 2 of 5G deployment and won’t happen for about another year. Phase 1, or infrastructure deployment, is happening right now.
Frankly, I’d be telling mistruths if I said Qualcomm isn’t one of my favorite 5G stocks, but it still doesn’t quite make my top three picks for 2019 because it’s still too early. Those slots are reserved for three infrastructure plays benefitting from 5G investment deployment (Phase 1) right now.
I know I keep beating the drum on this opportunity lately, but that’s only because 5G remains one of the most glaringly obvious investments in tech right now. It underlies a wide range of emerging technologies being pursued in force and is poised to prove one of the most profitable events in tech over the last decade.
If you have any doubts about this fact, I urge you to consider this free presentation on 5G and my top three 5G stock picks. Thousands of investors are already participating. My best advice is to join their quest for profit if you haven’t already.
Until next time,
Jason Stutman
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