Qualcomm (QCOM) Considers Exiting Server Chip Production

According to a Bloomberg report, Qualcomm Incorporated (NASDAQ:QCOM) is mulling to exit the market for production of high-end processors for data-center servers in order to focus on its core businesses. The strategic move is likely to benefit Intel Corporation (NASDAQ:INTC) , which reportedly has a stranglehold of the market with 99% market share.

Qualcomm is one of the largest manufacturers of mobile-phone chips in the world. With increasing saturation levels in the mobile-phone market, the company began developing chips for processors used in large data centers of firms like Alphabet (NASDAQ:GOOGL) Inc.’s (NASDAQ:GOOG) Google and Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Web Services. Although the chipsets used in smartphones and other mobile devices are shipped in large numbers compared to those used in large data center processors, they are priced much less relative to the premium price range of the latter and thereby generate lower margins.

Qualcomm sourced technology from ARM Holdings (LON:ARM) Plc, a leading manufacturer of microprocessors and one of Intel’s fiercest competitors, to develop a server chip titled Centriq 2400. The product reportedly offered comparatively better results than Intel Xeon Platinum 8180 processor based on energy efficiency and cost, and created a buzz in the market after its launch last year.

However, according to persons familiar with matter, Qualcomm is currently exploring options like winding down of the operations or finding a new owner for the business in order to reduce operating costs and focus on its core businesses. While the endeavor would help the company save millions of dollars through reduced R&D expenses, it would also increase its dependence on slow-growing market for mobile-phone chips.

Moreover, aggressive competition in the mobile phone chipset market is likely to hurt profits in the future. Although the global smartphone market is expected to maintain its momentum in the next four to five years, a major part of this growth is likely to come from low-cost emerging markets, which is likely to exert pressure on margins.

Qualcomm has underperformed the industry in the past three months with an average loss of 19.5% compared with a decline of 4.1% for the latter.

Whether a core business focus can indeed help the company to turn the tables and improve its sagging shares remains to be seen. Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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