By TrefisQualcomm ( QCOM) recently reported earnings, indicating that its royalty rates and chipset prices declined faster than we had expected. We've updated the Trefis price estimate for Qualcomm's stock from $43.53 to $41.64 (vs. market of $39.39) to reflect faster future declines in both royalty rates and chipset prices. Qualcomm's royalty rates on CDMA technology declined more than expected to 3.6% for 2009, down from 4% in 2008. The royalty rate represents the percentage of the average sale price of a CDMA mobile phone, sold by companies like Nokia and Motorola ( MOT), which is earned by Qualcomm. Increases in the number of low-end (low-price) phones and the lower royalty rates associated with them compared with higher-priced smartphones contributed to the recent decline. Mobile phone companies like Samsung, LG and HTC that pay royalties to Qualcomm and sell large volumes of low-end phones bargain for lower royalty rates due to pressure on their margins from falling mobile-phone prices. We expect that Qualcomm royalty rates will continue to decline and reach as low as 2.9% by the end of the Trefis forecast period. Qualcomm's CDMA chipset prices declined more than expected to $18.5 per chip in 2009, down from about $20 in 2008. We believe the declines are attributable to increased competition from chipmakers ST-Ericsson, IFX and Broadcom ( BRCM) in the 3G chipset market. We expect that chipset prices will continue to decline and reach as low as $17 by the end of the Trefis forecast period.
About 43% of Qualcomm's stock is attributable to its chipset business, while royalty rates constitute another 29% of the value. If chipset prices are $1 lower than we forecast, it will have a $1 negative impact on the stock (2% downside). Similarly, if royalty rates are 0.25% lower than we forecast, it will translate to a $1 negative impact on Qualcomm's stock.