Qualcomm headed for a ‘period of underperformance’

Qualcomm's new Snapdragon XR1 Platform is targeted at VR and AR glasses and goggles. (Qualcomm)

Qualcomm continues to work to expand its opportunities: Today, the company announced a new chip, the Snapdragon XR1 Platform, that’s designed specifically for virtual and augmented reality goggles and glasses, like the Oculus Go. The product is the latest indication that Qualcomm hopes to grow its opportunities beyond the slowing smartphone market.

But, according to one new report, Qualcomm is heading toward a “period of underperformance” that it may not be able to sidestep.

Specifically, the Wall Street analysts at Morgan Stanley Research reported that Qualcomm continues to face a series of difficult situations, and that even if the company is granted permission to acquire NXP—a strategy by Qualcomm to expand into the automotive business—it still won’t be able to meet investors’ growth expectations.

“Our $55 PT and UW rating reflect our view that post QCOM/NXPI closure, QCOM’s earnings and growth will be lower than the Street expects,” the Morgan Stanley analysts wrote in a note to investors yesterday. “Specifically, we don’t think Qualcomm can realize the targeted acquisition synergies, that resolving the Apple impasse is likely to take years, and that royalty collection challenges will grow, consigning QCOM to an extended period of underperformance.”

That stance is noteworthy given that the Morgan Stanley analysts wrote that they have “high conviction” that the Chinese government will ultimately approve Qualcomm’s proposed purchase of NXP: “China has significant incentive to continue to assure QCOM provides support for China’s 5G ambitions,” they wrote.

Indeed, it’s increasingly clear that Qualcomm’s NXP hopes may be tied to a wider trade battle between the United States and China. Just yesterday, Bloomberg reported that China will approve Qualcomm's deal for NXP if the Trump administration successfully lifts U.S. government restrictions on ZTE.

If Qualcomm is successful in acquiring NXP, the merger would give Qualcomm access to NXP’s extensive automotive business and customer base. That may well help the company expand beyond smartphones—indeed, IDC reported Wednesday that, after declining 0.3% in 2017, the worldwide smartphone market is expected to contract again this year, though it will return to growth in 2019 and beyond.

And Qualcomm’s new Snapdragon XR1 platform for virtual and augmented reality is another move by the company to target potential growth areas beyond phones.

In its announcement of the offering, Qualcomm said the platform offers “mainstream users high-quality XR experiences while enabling OEMs to develop mainstream devices. The XR1 platform also has special optimizations for Augmented Reality (AR) experiences with Artificial Intelligence (AI) capabilities offering better interactivity, power consumption and thermal efficiency.”

Qualcomm said Meta, VIVE, Vuzix and Picoare are developing products on its XR1 platform.

The platform sits in addition to new products the company has recently announced for wearables and the IoT.