Imagine that you own shares of a company that has, for the last several quarters, managed to hit record revenues. Further, this company is the clear leader in smartphone applications processors, 3G/4G modems, and has a patent war-chest that continues to yield massive profits at very little cost beyond R&D. In addition to owning the apps processors in almost every high end smartphone in the world, this company also happens to sell modems to Apple (AAPL).
Of course, the company I'm talking about is Qualcomm (QCOM). How quickly investors forget that this company smashed earnings estimates in its most recent quarter and also happened to blow away estimates for the current quarter. At its most recent analyst day, Qualcomm projected double-digit earnings and revenue growth through 2016. In addition to earnings power, the company's balance sheet is squeaky clean, with a $26 billion net cash and marketable securities position against a market capitalization of ~$102B.
Qualcomm is the world-leader when it comes to semiconductors that go into smartphones. And now, because Apple has reportedly cut orders to its suppliers (of which Qualcomm is just one), the market took the opportunity to put shares of this market leader on significant discount. For, what I hope to prove, completely irrational reasons.
Qualcomm Owns Smartphones
The smartphone market is growing, and it's growing quickly. According to IDC, smartphone growth looks like it's going to be huge. Some 45% huge. So when it comes to smartphones, Qualcomm sells baseband/modems, it sells apps processors, and it sells integrated baseband + apps processor solutions. Just how much of these markets does the firm have?
Well, in apps processors, the firm has a whopping 48% market share globally with a number of other smaller competitors taking significantly smaller parts of the pie. Intel (INTC) will be a major competitive force going forward given its sheer scale and process technology advantage, but Qualcomm's advantages in connectivity will likely mean that share gains for Intel will probably - at least in the near- to medium-term - come from the smaller vendors.
On the baseband side of things, Qualcomm holds a similar lead over its competitors, with 51% market share, with MediaTek and Intel taking 2nd and 3rd places, respectively.
Apple's Losses Are Neutral/Positive For Qualcomm
Qualcomm sells baseband processors to Apple, but not apps processors. Generally speaking, if Apple is losing market share, then someone else is gaining. The top Google (GOOG) Android phones such as the LG Optimus G, the Samsung Galaxy S III, and others all not only use Qualcomm's baseband, but also Qualcomm's applications processors. All of the Windows Phones, including Nokia's Lumia 920, have Qualcomm apps processor and baseband. To be perfectly clear, if Apple loses market share to an Android or Windows Phone 8 device, then Qualcomm is likely selling twice as many chips to the competitor as it is to Apple itself.
If the smartphone market itself were in secular decline or growth was slowing overall, then this would be a problem for the company, but iOS market share loss to Android or Windows Phone 8 is actually a positive for Qualcomm!
I Bought Qualcomm
I generally do not like to make such firm calls, but now is the time to seriously consider getting into Qualcomm if you missed the run up after the stellar earnings report and were kicking yourself. Don't go all-in, but start scaling slowing into a position as it drops, and exercise proper risk management. I don't know where the bottom is - we could retest $55 - but in the long term, this company is a winner, and I believe this iPhone-related pessimism is completely and utterly irrational. The only real "threats" I see looming on the horizon are Nvidia (NVDA) and Intel, but even then, the TAM for smartphones should increase far more than any potential market share gain losses to these entrants.
But in no way is Apple losing share to other Qualcomm customers a negative for Qualcomm. And that's why at under $60, Qualcomm is a bargain that cannot be ignored.