Qualcomm & Spotify – The 5G podcast.

Qualcomm FQ1 20 – 5G story.

• Qualcomm reported good results as the roll-out of 5G is gathering pace but the uncertainty in China is likely to impact Qualcomm more than most.
• FQ1 20 revenues / EPS were $5.08bn / $0.80 compared to forecasts of $4.83bn / $0.55 but like Apple, it has been forced to widen its guidance range at the lower end.
• Overall guidance was in line with expectations, but the range is slightly wider than usual as the impact of the Coronavirus on both 5G demand in China and the overall handset supply chain remains very uncertain.
• Most factories and workplaces are gearing up to return to work on the 10^th of February, but as the number of cases and fatalities continues to climb, there is some uncertainty around this.
• The central government remains in full control and has threatened severe punishment for any regions that break ranks and allow workers back to work before the centralised say so (see here).
• This could easily drag on past February 10^th.
• While competitors have come up with working 5G modems much more quickly than they did in previous generations, Qualcomm still has an advantage in two key areas.
• These are in the radio front end (electronics which sit between the baseband and the antenna in a handset) and in millimetre wave (28Ghz and up).
• Others have caught up in the 5G modems partially because 5G is actually not that different from 4G, but where most of the changes have been made, Qualcomm still has a lead.
• It remains the only game in town when it comes to millimetre wave which has real issues with signal propagation due to the frequencies at which it operates.
• These are good advantages that will help Qualcomm hold share during the initial rollout of 5G, but it will have to work to keep this edge as 5G technology starts to mature.
• Qualcomm has had a very good run in the last 12 months and compared to other technology stocks its valuation is not yet massively stretched.
• Hence, I am inclined to keep my positive position on the share price for now.

Spotify Q4 19 – Hidden podcasts.

• Spotify reported weak results and doubled down on podcasting as a way to push back against the increasing pressure from Apple Music, Amazon Music and so on, its much larger and stronger rivals.
• Q4 19 revenues / EPS were €1.86bn / LOSS€1.14 compared to estimates of €1.83bn / LOSS€0.77 despite faring better than expected when it came to subscribers.
• Spotify now has 124m premium subscribers, 147m free subscribers (271m total) which it expects to continue growing into Q1 20.
• Part of the problem is that in order to keep growing subscribers, Spotify has to push into lower and lower ASP markets as well as run promotions.
• This has had the effect of lowering ARPU but at the same time expenses remain unchanged which has hurt profitability.
• Spotify also paid the price for being domiciled in Sweden which levies a tax on stock-based compensation when the share price rises meaning that OPEX came in €20m ahead of expectations.
• Spotify also announced the acquisition of Bill Simmons’ The Ringer to improve its coverage of sports podcasting in a bid to create differentiation from Apple Music and Amazon Music.
• The spoken word is an area of growth in terms of time spent and Spotify is right to pursue this vertical.
• However, its user experience needs to be adapted to include this vertical as discovery of podcasts is cumbersome and difficult on its app which has been designed primarily for music.
• Furthermore, its algorithms are designed to categorize and understand music not the spoken word and so it will be very difficult to migrate this functionality across.
• Consequently, I think podcasts will take time to have a positive impact on Spotify’s brand and its profitability.
• I still think that its best shot is to replace the labels which it is quite capable of doing and in that way, there would be a lot more revenue both for artists and Spotify shareholders.
• This is the reason to own Spotify shares and until I see more signs of this I will be staying on the sidelines.