I like to think of reasons why something is a bad idea, as sort of proof by contradiction, if you will. The long case for Qualcomm (NASDAQ:QCOM) is so obvious that anybody can understand it:
- They make the chips that go into almost every modern smartphone.
- They collect a hefty set of license fees from their vast patent portfolio spanning almost everything related to modern wireless communications.
- They're growing at a 20%+ clip year-over-year.
- They're highly profitable.
- Their balance sheet is as pristine as it gets (no debt, $28B in cash).
I have no idea why people sell this stock off whenever Apple (NASDAQ:AAPL) sneezes, nor do I understand what negatives anybody could possibly come up with respect to this company:
- Valuation? Nope. EPS is growing like crazy, and at this rate, the company is on track to become the most profitable semiconductor company in the world. Based on the raised full-year estimates, Qualcomm trades at a mere 18x earnings.
- Competitive position? Nope. No other company has viable 4G smartphone solutions shipping today. While competition may come during late 2013/early 2014, the market itself is in very strong secular growth.
- Low quality growth? Nope. This company is growing revenues and earnings by dominating a secular growth market. Margins are excellent, R&D spend is appropriate to maintain a strong competitive position, and it is significantly ahead of any of its competitors in terms.
- Tied to Apple? Please. This company supplies all of Apple's competitors, and likely ships more silicon to those competitors than it does to Apple. If an HTC phone steals market share from Apple, then odds are Qualcomm is providing both the modem and apps processor, making even more money than it would if Apple had gotten that order.
Qualcomm smacked the midpoint of its EPS guidance of $0.94/share in the face by reporting $1.09/share, a 16% beat. The company also raised full-year guidance from $23B - $24B to $23.4B - $24.4B in sales, and expect to do $3.61 - $3.81 in non-GAAP EPS. This means that at current prices, the stock trades at a mere 18x forward GAAP earnings for Amazon (NASDAQ:AMZN)-like topline growth!
In short, Qualcomm nailed it.
Right now, Qualcomm runs unopposed in 4G LTE baseband hardware sales, which has led to the healthy adoption of its Snapdragon S4 processors. While I believe Qualcomm will be the market leader for all of 2013 and for the majority of 2014, the competition to this near monopoly will be present from the likes of Broadcom (NASDAQ:BRCM), Nvidia (NASDAQ:NVDA), Intel (NASDAQ:INTC), and others by the middle of 2014. Qualcomm will, by definition, lose market share. But will this market share loss slow or even reverse growth? Probably not, since the market itself is expanding at such a rapid clip over the next several years, but it's something to keep in mind. Watch the numbers next year.
But for now, Qualcomm investors have something really exciting in their portfolios, and I believe that there is no reason for anybody to sell today. A beat-and-raise is rare in this terrible macroeconomic environment, and that goes double for semiconductors. This company is one of the strongest, most well-managed firms out there, and it is a key player in one of the most explosive secular growth stories out there.
The odds are good that if you own Qualcomm, you're sitting on some nice capital gains. Enjoy them, and know that there's plenty more to come from this juggernaut.