Qualcomm (NASDAQ: QCOM) could be the major beneficiary if Nokia (NYSE: NOK) shifts its smartphone operating system (OS) strategy.
Market analysts are widely speculating that Finnish mobile giant Nokia will adopt either Google's Android or Microsoft's Windows Phone 7 (WP7) as its smartphone OS to regain its market share in the United States, which is the biggest market for smartphones.
We increasingly believe that Nokia is likely to pursue a new OS strategy for smartphones, moving away from Symbian/MeeGo and toward a third party software platform such as Android or Windows Phone 7, Credit Suisse analyst Kulbinder Garcha wrote in a note to clients.
Analysts believe that the potential shift to either Android or Windows Phone 7 from Symbian is likely to result in changes to Nokia's chipset strategy and accelerate the shift away from Texas Instruments, which remains the dominant chipset vendor for Nokia. Texas Instruments still had an 80 percent share of Nokia's WCDMA handsets in 2010.
In August 2007, Nokia said it would move away the custom baseband solution (co-developed with Texas Instruments) that was used almost across its entire portfolio.
Though Nokia announced Qualcomm as a supplier in early 2009 at the Mobile World Congress, with the expectation to launch a smartphone for the North American market by mid-2010, the company has yet to do so, indicating that any change in chipset strategy at Nokia is likely to take time.
That said, Nokia's move to a new OS platform for smartphones could accelerate the company's chipset vendor transition, especially since Texas Instruments in the process of winding down its wireless baseband business. Though analysts do not expect Qualcomm to have Nokia as a meaningful customer until mid-2012 at the earliest, it should bode well for Qualcomm in the long term.
Credit Suisse analysts, who said a shift in Nokia's smartphone OS strategy would be a major win for Qualcomm's chipset business, said: Going forward we would highlight this could lead to higher degree of cooperation between Nokia and Qualcomm with the possibility of handset vendor using Qualcomm's chipsets for its overall WCDMA handset business.
A closer alignment with Nokia would not only establish Qualcomm as now having meaningful chipset business from every major handset maker, but would also drive 4-6 percent upside to fiscal 2013 earnings power.
We believe such a change in strategic direction by Nokia bodes well for future design wins for Qualcomm's chipset business given the company's close alignment with both leading open software platforms, Android and Windows Phone 7, Credit Suisse analysts wrote.
Analysts believe that Nokia's move away from Symbian/MeeGo would be a win for Qualcomm regardless of whether Nokia chooses Android or Windows Phone 7 as its new platform. Qualcomm has closely aligned itself with both, as its chips are used in many smartphones that feature the two operating systems. This is especially true of Windows Phone 7-based models, all of which use Qualcomm's Snapdragon processor.
That puts the company in a position to land design wins at Nokia if it changes tack and moves away from Symbian and MeeGo.
The analysts said having Nokia as a meaningful chipset customer could drive Qualcomm's WCDMA chipset market share towards 53 percent in 2013 from 39 percent in 2010. This prediction is based on the assumption that Qualcomm will win 50 percent of Nokia's new Android/WP7 smartphones in 2012 and 2013.
Given the company's dominant chipset position with both OS' currently (about 100 percent share in 2010), this could prove conservative, the analysts said.
While this high level of market share for Qualcomm at both platforms (Android and Windows Phone 7) is likely unsustainable as competitors (including Broadcom, Infineon, ST-Ericsson, MediaTek etc.) launch Android-compatible products, we believe that Qualcomm is nonetheless well positioned to benefit from any change in software strategy at Nokia, the analysts added.
Credit Suisse has an outperform rating and $65 price target on Qualcomm stock.