Xiaomi / QUALCOMM, Inc Deal Could Send QCOM Stock Surging

QCOM StockCould QCOM Stock Keep Growing?

QUALCOMM, Inc. (NASDAQ:QCOM) has a major tailwind and its name is China—or Chyn-ah! as Donald Trump would say. Increased sales to Xiaomi drove QCOM stock up 17.93% in the last 30 days, which is exactly what I predicted would happen.

It’s not that I have some Magic 8 ball—I was just watching the industry pretty closely.

Microchip makers like Qualcomm are facing an existential crisis that threatens to cripple the value of QCOM stock. There are only two things that can be done.

One option is to pair up with other firms, whether through mergers or acquisitions. If companies consolidate their market power and resources, they have a better shot at survival. We’ve seen tons of microchip makers take this route.

Think of Intel Corporation buying Altera Corporation, Avago Technologies Ltd. merging with Broadcom Corporation, or Dell Inc.’s takeover of EMC Corporation. (Source: “A $30 billion merger is more evidence of the tech market’s most dominant trend right now,” Business Insider, July 26, 2016.)

All of this market consolidation is hopefully going to put a floor on microchip prices, but it’s not the only way to save QCOM stock. There is another way…

The second option Qualcomm could save itself is by making better microchips than its rivals, which is to say through innovation.

This is definitely a riskier path for QCOM stock than the merger route, but it also carries a higher reward. Why? Because there is no roadmap for innovation. It’s more like a process of discovery, so Qualcomm will have to out-invent everyone in order to win.

That being said, a win on innovation can be incredibly profitable.

Snapdragon 820 Powers QCOM Stock Growth

The market expected Qualcomm to sell between 175 million and 195 million microchips over the last three months. The company actually sold 201 million. (Source: “Qualcomm Chip Shipments Power Quarterly Results,” The Wall Street Journal, July 20, 2016.)

Funnily enough, the surge in demand came from Chinese manufacturers, many of whom were looking to challenge their international counterparts. Samsung Electronics Ltd. and Apple Inc. should watch out.

Companies like Xiaomi are looking to expand their reach by making cheaper smartphones that still deliver the same quality as Samsung phone and “iPhones.” It’s an ambitious goal that was only made possible due to Qualcomm’s recent breakthrough chip—the “Snapdragon 820.”

This microchip is so advanced that it can run virtual reality (VR) and other applications for connected devices, all for a competitive price. That’s how Xiaomi can hope to sell cutting-edge smartphones for $399.00.

It really wouldn’t be possible without the Snapdragon 820. Better-than-expected sales of this chip led to a sudden surge in QCOM stock, which goes to show that innovation can benefit everyone involved. Investors remembered that innovation is what made these microchip stocks attractive in the first place, so perhaps companies that carry on that tradition are the ones that deserve the dollars.

In any case, is this trend going to continue? QCOM stock appreciated 18.03% over the last month, but as we know, past trends are not indicative of future performance. The real question is whether or not QCOM stock can keep up its momentum?

Let’s take a closer look…

Looking Ahead for QCOM Stock

There are rumors that Xiaomi is working on its own microchip to keep production entirely in-house. The idea is that those microchips would go into Xiaomi’s cheaper phones, while the Snapdragon 820 would remain in its more expensive line-up.

This would obviously be a huge blow to QCOM stock, mainly because Chinese manufacturers are the final frontier for Qualcomm. I certainly wouldn’t be bullish on QCOM stock if this rumor turns out to be true. That being said, it’s only a rumor right now. Xiaomi has not confirmed these reports, so there’s no need to panic.

Even if the company does have a secret program to build its own microchips, it may not matter very much. Unless Xiaomi can match Qualcomm chips in quality and price, the company has no choice but to continue to pay for Snapdragon 820s.

Considering that Xiaomi signed a patent-sharing deal with Qualcomm last year, I don’t see this threat materializing anytime soon. QCOM stock is still on track for massive gains driven by the expansion of companies like Xiaomi.