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Qualcomm (QCOM) is the largest semiconductor supplier of the smartphone industry. The company holds a 36% stake in application processor shipments and, according to IDC, the smartphone industry is growing at 45% per annum. Qualcomm, much like Apple (AAPL), is followed closely by analysts and investors. This makes meeting expectations very difficult, let alone beating them. Still, QCOM has beaten analysts' estimates in 3 of the last 4 quarters. We believe that the margins of smartphone semiconductor companies will expand as they get more bargaining power in a maturing industry. We have a buy rating on QCOM.

4Q2012:

On Thursday, Qualcomm announced its quarterly results for the quarter ended September 2012. The market was expecting an EPS of $0.82 and year end EPS of $4.13. The market was also expecting annual sales of $21.69 billion and the company had guided its sales for the year end to be in the range of $23-$24 billion. Qualcomm reported profits of $1.27 billion i.e. 89 cents ($0.73 GAAP) per share for the last quarter of its fiscal year. Qualcomm was able to beat analysts' earnings estimates by approximately 9%.


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Source: Company Disclosures

If we compare current performance with the performance in the same period of last year, we see a significant improvement. There was an 18% improvement in revenues. Revenue was $4.87 billion in the current quarter as compared to $4.12 in the same quarter of last year. EPS showed an 11% growth YoY, ending up at $0.89 for the current quarter. If we look at the break down of sales, there was a significant increase in the shipments of MSM chips. MSM shipments in 4Q2011 were 127 million and increased 11% to 141 million this quarter. This increase has been driven by increased demand for those Qualcomm's products that are meant for wireless devices, especially smartphones.

Fiscal Year 2012:


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Source: Company Presentation

Figures for the fiscal year 2012 show more growth compared to those in the Q4 YoY analysis that we complied above. The revenue for the year ended are $19.1 billion compared to $14.96 billion in 2011; an impressive growth of 28%. EPS showed a growth of 16% YoY while MSM chip shipments grew by approximately 22%. The total device sales were up 25% as compared to the same period of last year.

Smartphone Growth:

In our last update on QCOM, we analyzed the company's different segments and their contribution to revenue. CDMA is the largest contributor (59%) to QCOM's revenue, followed by Tech Licensing (36%) and Wireless Group (4%). This shows that QCOM is almost entirely dependent on Telecommunication and Cell Phone Industries. The smartphone industry is one of the most lucrative and fastest growing industries in the world. In a recent report by IDC, it was reported that the smartphone industry showed a growth of over 45% in the last quarter. The figures below reveal that Samsung and Apple are among the leading growth agents in this sector and QCOM provides them with a lot of the hardware parts used in their smartphone products e.g. Snapdragon in Samsung's S3 phone.

Top Five Smartphone Vendors, Shipments, and Market Share, 2012 Q3 (Units in Millions) Source: IDC

Vendor

3Q12 Unit Shipments

3Q11 Unit Shipments

YoY Change

Samsung (OTC:SSNLF)

56.3

28.1

100.40%

Apple

26.9

17.1

57.30%

Research In Motion (RIMM)

7.7

11.8

-34.70%

ZTE (OTCPK:ZTCOF)

7.5

4.1

82.90%

HTC (OTC:HTCCY)

7.3

12.7

-42.50%

Others

74

49.9

48.30%

Total

179.7

123.7

45.30%

The table below, compiled by Forward Concepts, shows the smartphone application processor shipments in 1H2012. The data shows that Qualcomm is the clear leader in this industry. Our above analysis shows that, according to the latest figures, the smartphone industry is growing at a rate of 45% YoY. Qualcomm is the most likely stock to benefit from this growth.

Application Processor shipment in million units


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Source: Forward Concepts

Outlook:

Along with its last quarter earnings, QCOM also revealed its expectations for the next quarter. Qualcomm expects its revenue for the next quarter to be in the range of $5.6-$6.1 billion. Street is expecting revenues of $5.3 billion in the next quarter. The company also gave a $1.08-$1.16 EPS range for the coming quarter, which is much higher than the average EPS estimate of $1.0. QCOM expects next year's EPS to be in the range of $4.12-$4.32 per share, on a revenue of $23 to $24 billion. Sell side is expecting EPS for the next year to be around $4.13, on revenue of $21.7 billion.

In our previous articles we had analyzed different business trends in the smartphone industry. The smartphone Industry is fast approaching maturity. Apple's iPhone may well be the most profitable technology product of all time, with margins as high as 57%. The last quarter's results reveal that these margins have decreased, as we had suspected, indicating the maturity in the smartphone industry. This might not be such a bad thing for smartphone semiconductor companies. We believe the industry is moving away from design based differentiation to specification based differentiation. A very good example of this trend was seen after the launch of the iPad mini. The Apple team was forced to compare their new product with its existing competition because the market is not willing to pay for only product design anymore. This represents an excellent opportunity for the leading smartphone semiconductor company, QCOM. The reason for this is that specification based differentiation increases the bargaining power of vendors. Going into the future, we believe the company will enjoy increasing margins and steady growth.

Valuations:

Company

P/E

PEG

Qualcomm

13.9x

1x

Intel (INTC)

10.6x

0.8x

Nvidia (NVDA)

12.2x

1.14x

Broadcom (BRCM)

12.2

1.14x

Qualcomm has the second lowest PEG ratio among similar companies. The stock is currently trading at 13.9x its 2014 earnings, which is lower than NASDAQ's PE of 15x. This low PEG indicates that the high growth potential of the company is not being discounted properly by the market.

Analyst Opinion:


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Source: Yahoo Finance

The graph above shows that a large majority of analysts are giving a buy or strong buy rating for QCOM. In the current month, only 2 have a sell or underperform rating, while 5 analysts are giving a hold rating.

Conclusion:

QCOM is still very cheap, with a P/E of 14x. Our research shows increasing sales and margins going forward. That is why we still believe that QCOM is the best placed technology stock and give a buy rating for QCOM.

Source: Why Is Qualcomm The Best Technology Stock To Buy?