Qualcomm Stock Prediction: Cloud Gaming Is Qualcomm’s First Incursion In The Server Market

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Summary:

  • Qualcomm’s datacenter push gets a boost from its new contract to supply datacenter processors to Hatch, the pioneer in cloud-based mobile games on demand.
  • Hatch picked Qualcomm’s scalable 48-core Centriq 2400 to power its cloud gaming service.
  • Instead of players buying games or spending for in-app purchases, Hatch plans to offer unlimited game time for a fixed monthly fee.
  • This radical plan to offer mobile games-as-a-service could become a global-wide hit. Hatch will be buying many Centriq 2400 processors to support its global infrastructure.
  • I rated QCOM as a buy last August 9 when it closed below $52. The stock is now trading above $62. I am still giving it a buy rating. My 2018 year-end PT for it is $70.

 

We all know that Intel (INTC) still enjoy a pseudo-monopoly (98% market share) on datacenter/server processors. Cheaper ARM-based server processors were touted in 2012 to eventually compete with Intel Xeon. However, six years after, ARM-based server processors doesn’t even have a 1% market share. This bleak situation can improve this year with Qualcomm (QCOM) winning the contract to supply its 10-nanometer 48-core Centriq 2400 server processors to Hatch.

Cloud gaming could be Qualcomm’s first major foothold in the $50 billion server market. If some Fortune 1,000 companies start noticing that Centriq 2400 can handle cloud gaming, they might also consider it for enterprise cloud applications.

Qualcomm stock prediction new chip

(Source: Qualcomm)

Hatch is a start-up that is pioneering subscription-based mobile games streaming. The beta version of Hatch’s cloud gaming app is already available in 16 countries. Going forward, Hatch could potentially buy tens or hundreds of thousands of Qualcomm’s Centriq 2400-series of server processors. The core idea of cloud gaming is that servers will handle all of the heavy game compute workload. Hatch therefore needs tons of server processors to make its business viable.

The 48-core version of Centriq has a list price of $1,995. One hundred thousand units sold could add $195 million in new revenue to Qualcomm. With smartphone sales dipping, Qualcomm needs new sources of revenue. My 100k estimates is very conservative. I once hosted a 50-player limit Ran Online private server on a quad-core Core 2 quad, 16GB RAM PC rig. Ran Online required players to install the game’s client on the PC. I suspect that a 48-core Centriq is only capable of hosting up to 250 streaming players. A number more than that and the gaming experience could suffer. In theory, a cloud gaming service provider will need 400k units of a 48-core Centriq server to adequately service 100 million paying customers.

Hatch will have to scale out its cloud server infrastructure to properly serve players in 16 countries. The potential of an international subscription-based mobile gaming is that it can attract more than 100 million paying subscribers.

My 100 million subscribers guesstimate is also reasonable.

There are now more than 2 billion mobile gamers.  The mobile gaming industry is expected to generate $55-to-$60 billion this year. Netflix (NFLX) was able to recruit more than 100 million paying customers for its streaming TV/video service. The Netflix-like nature of on-demand mobile gaming can demand $14.99 monthly fee and millions of gamers will still be interested.

Why Hatch Cloud Gaming Could Be A Hit

Paying players know that the true cost of freemium mobile games is actually more than $14.99/month. As early as 2016, the global average for in-app purchase was already $9.39/month per app. The hardcore mobile gamers spent an average of $87 monthly on their “free-to-play” games like Candy Crush Saga, Clash Royale, and Game of War: Fire Age.

The massive growth in mobile gaming revenue is due to these in-app purchases inside free-to-play games. Hatch’s business plan is to offer an alternative monetization to in-app purchases. This helps dedicated mobile gamers save money. Mobile-Games-as-a-Service [MGaaS] for flat monthly fee More than a dozen video games developers/publishers are backing Hatch’s ‘no-download, play-instantly’ approach to mobile games.  They appreciated the potential of recurring revenue from monthly subscribers.

Hatch’s proprietary technology is the commercial implementation of Google’s (GOOGL) app streaming ambition. It can appeal to casual and hardcore mobile gamers who want to save storage on their smartphones/tablets. The latest batches of mobile games such as Tencent’s (TCEHY) Arena of Valor now requires 2GB of free storage and 3GB of RAM. Most phones sold today still has less than 12GB free space left when shipped out.

Streaming mobile games can extend the life of smartphones/tablets. As a former heavy mobile gamer (who played too much and destroyed two iPad Minis from overheated motherboards/SoC), I know how beneficial it is to have cloud server processors carry the CPU/GPU workloads of modern Unreal/Unity engine-based mobile games.

Conclusion

The deal with Hatch is Qualcomm’s first ray of hope that it can compete in the $50 billion server market. Qualcomm needs new markets for its processors. Most major smartphone/tablet vendors now build their own mobile processors. I expect smartphone application Snapdragon processors to start notable decline in global starting this year.

Becoming relevant in the server market is an urgent thing for Qualcomm. Without a foothold on this particular industry, Qualcomm risks negative annual growth. Furthermore, needs to sell fast more of its Centriq processors because it will need extra income to service its upcoming new debt over its $44 billion acquisition offer to NXP. Qualcomm will probably have to borrow up to $20 billion to acquire NXP.

Lastly, even though QCOM already trades at above $62, I still rate it as a buy for long-term investing purposes. My last endorsement for it last August 9 proved to be a winner. Back then QCOM traded below $52. The stock could hit $70 this year if and when Apple (AAPL) decides to settle out of court over its current patents-related legal war against Qualcomm. It could also hit $70 if a few Fortune 500 company also starts making wholesale purchase orders of Qualcomm’s Centriq 2400 datacenter/server processors.

Qualcomm stock prediction-1 graph

(Source: YCharts)

I Know First also has positive 3-month/1-year algorithmic market trend scores for QCOM.

Qualcomm stock prediction

My $70 year end 2018 PT for QCOM is lower than the average price target for it published by TipRanks-tracked Wall Street analysts. Other analysts are still bullish on QCOM. This is in spite of its urgently increasing bid (from $38 to $44 billion) for NXP Semiconductors. Wall Street likes it that Qualcomm is rushing its diversification.

Qualcomm stock prediction fin pic (Source: TipRanks)

Past I Know First Success with QCOM

I Know First has predicted QCOM’s stock movements correctly in the past. This article was bullish on QCOM in August 2017 within 3 months horizon, and QCOM was up 23.42% in November 2017.

(Source: Yahoo Finance)

I Know First Algorithm Heatmap Explanation

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day, and can be simplified explained as the correlation based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to fill confident about/trust the signal.

 


 

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