Qualcomm's Second Bet: Internet of Things
- By Sangara Narayanan
There are several companies betting big on the growth of the Internet of Things industry and semiconductor companieslike Intel (INTC) and Qualcomm (QCOM) are both fighting for their own places in a sector that is expected to steadily grow in the next few years on the back of a rapid increase in connected devices.
Qualcomm has been a leader in the smart-phone chip market with their Snapdragon processors and in my recent article, I covered in detail why I thought the current revenue slump that the company is going through may not last. The LTE technology leader stands to benefit when our data consumption grows in the future.
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As revenues edges lower with the prolonged slump in smartphone sales around the world, led by the slowdown in China, Qualcomm has resorted to cost savings measures and expects to save $1.4 billion this year.
Where will the IoT industry take Qualcomm?
There are two sides to how the Internet of Things will grow into a viable segment. The first is the proliferation of connected devices with embedded instrumentation. This is where Intel, Cisco (CSCO), Qualcomm and every other connectivity or semiconductor company fits into the bigger picture.
The billions of data points generated by millions of connected devices each year need to be captured, processed and then moved up the IoT chain, so there is tremendous opportunity here. In a recent interview I did with Chris O'Connor, General Manager of IoT Offerings at IBM (IBM), he said that the impact of IoT on the market would be somewhere in the range of $10 trillion. That is not the market opportunity, but the net impact of all IoT projects around the world.
The actual market is still very small - according to Technology Business Research , the fourth quarter 2015 IoT revenues of the top 21 players in the industry was a mere $6.7 billion. That means the entire market for this fiscal is going to be a lot less than $30 billion. There is not much to go around at this point, but as the growth rate increases, these companies will be making billions each.
In a way, IoT adoption will be very similar to cloud adoption. When cloud infrastructure was first introduced, the market could be counted in the tens of millions. As cloud became more popular, it started growing faster. Right now, the biggest cloud companies in the world are growing at mid-double-digit levels and some of them are even showing triple-digit growth.
Clearly, it is a nascent industry with massive potential, but a lot depends on how fast enterprises are ready to adopt the new technology. But the push has already started and Intel already provides standalone numbers for their Internet of Things group, a clear indication that the company sees a future revenue driver in the segment.
This is another area where Qualcomm could see long-term growth.
From their third quarter earnings call:
"We are also extending our proven leadership in modem solutions into the Internet of Things with over 100 design from more than 60 manufacturers using our low power LTE IOT modems. In networking, we continue to drive the transition to the new Wave 2 11ac standard for WiFi networks and now have over 350 home and enterprise products either in production or design across mainstream and premium segments.
We are on track to close our TDK JV by early calendar 2017 and to deliver our next generation Gallium arsenide and CMOS PAs in 2017. This will enable us to provide a comprehensive set of technologies and module capability for the RF front-end positioning us well for key industry trends, complexity increases within smartphones, the proliferation of radio bands in 4G and 5G and the growth of cellular in IOT."
So Qualcomm has already invested a lot of time and energy on developing its IOT expertise and product line up and is the current patent leader in the segment.
While it's still very early to call out Qualcomm as a clear winner in the IoT business, the signs of future success are all there. If it can repeat the kind of performance it has shown in the smartphone market, that is a solid additional revenue stream that will grow well into the next decade and beyond.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of QCOM
