Qualcomm (QCOM) has given considerable attention to the Qualcomm Reference Design (QRD) program, with the commercial launch of more than 170 devices and more than 100 designs in progress, supporting various network technologies -- including LTE. Qualcomm will share details surrounding this achievement and further expansion of the reference design program at the QRD Summit to be held in China tomorrow.
Qualcomm unveiled its new chipset at CES, to be launched over the summer. The chipset is expected to considerably enhance the performance of mobile devices. The new chipset is named Snapdragon 800, and is said to have unmatched features in the mobile chipset market, with processing power that is almost equal to that of PC chips. The processor is also 75% faster than S4. Additionally, the graphics processing can handle UltraHD content that has four times the resolution of full HD.
Qualcomm is also working on establishing new partnerships. Audi recently announced that Qualcomm will provide in-car technology for A3 models, along with 4G LTE connectivity.
The mobile device market is experiencing robust demand growth, with the smartphone market witnessing explosive growth. The fact that Qualcomm was able to clock 28% increase in sales in 2012, regardless of not meeting the demand highlights the fundamentals of the mobile market.
Smartphone sales have shown significant growth in 2012, and assuming the high growth rates continue, 2013 is also likely to be a strong year. Despite ambiguity about the macroeconomic scenario, the demand for smartphones remains strong. iPhone and Android-based smartphones have both registered extremely high growth, and the launch of WP8 smartphones should push the market even higher with more ecosystems spoiling the customer for choice. Over the past four quarters, Qualcomm shipped nearly 249 million units and holds approximately 25% of the market share in smartphone chips market.
Simultaneously, tablet growth is also picking up serious momentum. Gartner estimates that the market for tablets has grown by over 98% in 2012 and will continue to grow, to reach about 369 million units by 2016.
Well-Diversified Customer Base
Qualcomm is one of the major suppliers to Apple (AAPL), and was one of the very few companies whose stock price was relatively unscathed by the recent production cutback rumors at Apple, despite being up almost 8% over the past month. We believe that investors need not be much anxious even if Apple has actually reduced its orders because Qualcomm has one of the most well-diversified customer bases, with ample number of hardware partners for any single customer to have a large impact.
In fact, Apple's market share loss could very well be a boon for Qualcomm as it will be a gain for Android or Windows Phone, both of which have a large Qualcomm presence. Android and iOS together account for 85% of the smartphone market but that could change in the coming years, with the entry of Microsoft (MSFT). Since Microsoft has signed up with Qualcomm as the sole supplier of chipsets for WP8 handsets, Qualcomm has that base covered as well.
To add to the diversity, even the upcoming BB10 smartphones are rumored to run on Qualcomm's S4 integrated chipsets.
Qualcomm is the third largest semiconductor producer based on revenues. Qualcomm faces significant competition in all segments as Intel (INTC), the incumbent market leader is also trying to get some share in the mobile market. Another emerging rival for Qualcomm is MediaTek, which has shown tenfold surge in the past year in its Smartphone processors. Qualcomm's Snapdragon processors have been its key advantage over competitors. Nevertheless, the company still faces increased competition from other companies like Broadcom (BRCM), MediaTek, and Spreadtrum Communications (SPRD).
At $64 per share, the stock is now trading near its 52-week high of $68.87 that it reached in March 2012. Qualcomm's valuation appears to be tempting based on the company's solid financial performance relative to its peers. The current stock valuations at 15.0x forward P/E, which represents a steep discount to the peer-average trading multiples.
Qualcomm has a higher operating margin of 30% as compared to Broadcom and Mediatek, whose margins are 9% and 14%, respectively. Yet it trades at a P/E of 21 compared to its rivals, both of which trade at a much higher multiple of more than 26.
Forty-one out of 46 analysts surveyed by Reuters have given a Buy or Outperform rating. Qualcomm has a sturdy balance sheet with low leverage and abundant liquidity. The company also generates loads of cash, with a free cash flow margin above 20%. Qualcomm's strong growth potential, robust profitability, low leverage, and liquid balance sheet -- as well as attractive valuation levels -- should justify a solid stock valuation with a Buy recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.