Qualcomm continues to collect billions of dollars in “tolls,” royalties for letting smartphone makers use their chips, but Apple cannot take it anymore, as evidenced by the company’s recent action against Qualcomm.
What has changed? Competition and market saturation are catching up with Apple, putting pressure on its operating margins, and sales and earnings growth—see table. So every dollar it can squeeze from suppliers will help.
Besides, the timing is ripe. Qualcomm’s business model has been under attack by regulators and customers around the world. Why not seize the moment?
Apple’s Key Financial Metrics As of 1/20, 2017
Forward PE |
11.88 |
Operating Margin |
27.83% |
Qtrly Revenue Growth (yoy) |
-9.0% |
Qtrly Earnings Growth (yoy) |
-19.0 |
52-week change |
18.32% |
Source: Finance.yahoo.com
Apple’s Key Financial Metrics As of June 23, 2015
Forward PE |
13.11 |
Operating Margin |
30.15% |
Qtrly Revenue Growth (yoy) |
27.10% |
Qtrly Earnings Growth (yoy) |
32.70% |
Source: Finance.yahoo.com
For two decades, Qualcomm has been growing exponentially. For a good reason: it has been in the right business at the right time—wireless technologies—capitalizing on one mobile communications trend after another, as its products became the industry standard.
Qualcomm is the leading maker of LTE chips, and has a long list of big customers, including Samsung Electronics and Apple
Qualcomm’s revenues come from the manufacture and sale of chips that go into much of the world’s smartphones, and from royalties from licensing this technology to other chip makers.
Simply put, Qualcomm has turned into a toll collector for almost every smartphone manufactured.
And as a sole collector it has been a price-maker, setting the price of the tolls. That could explain the company’ hefty operating margins and robust earnings growth over the last two decades.
Qualcomm’ Financials
Forward PE |
12.60 |
Operating Margins |
28.92% |
Qtrly Revenue Growth |
13.30% |
Qtrly Earnings Growth |
50.60% |
52-week change |
30.61% |
Source: Finance.yahoo.com 1/20/2017
But in recent years, Qualcomm’s business model has been challenged by regulators and customers around the world, and especially in its largest market, China.
A couple of years ago, for instance, China’s National Development and Reform Commission launched an investigation into the company’s business practices in that country, which ended with Qualcomm paying near a billion dollar fine.
Apparently, however, the Chinese government has failed to change the rules for Qualcomm, which remains a toll collector for smartphone makers.
Will Apple change Qualcomm’s business model? Wall Street seems to think so, as evidenced by the sharp sell off in Qualcomm’s shares today.
