Qualcomm Inc.(QCOM) is at the top of its game right now. But like every champion, it doesn't get to celebrate but for a moment until the inevitable question comes: How long can you stay on top?
On the surface, there's little reason to doubt Qualcomm's future prospects. The developer of advanced wireless technologies, products and services and leading chipmaker blew away market expectations during its fiscal first quarter earnings release in late January.
Revenues for the quarter reached a record $6 billion, 29% higher than the same period in 2011 and slightly above industry projections of $5.9 billion. Its net income came in at $2.2 billion, up 36% from the previous year. Its quarterly record of $1.26 a share bested industry projections of $1.12 a share. This came after its fiscal fourth quarter report, in which net income surged 20% over the previous fourth quarter and revenue climbed 18%.
Qualcomm also provided second quarter and fiscal 2013 guidance in its earnings release. The company believes it will post revenue of $5.8 billion-$6.3 billion in the second quarter, and earnings per share of $1.10-$1.18. For the full year, it anticipates revenue of $23.4 billion-$24.4 billion, with EPS of $4.25-$4.45. The latter set of figures represents an increase over the company's previous guidance, as well as the average analyst estimate.
Qualcomm has had net profit margins in the range of 15.3% to 37.8% over the last 10 years with an average net profit margin of 29.5%.
The company's earnings per share have grown steadily over the past decade, save for the recessionary years of 2008 and 2009. In fact, remove those two years from the past 10, and its annual EPS chart would look like a flight of stairs:
- 2003: $0.50 a share
- 2004: $1.01 a share
- 2005: $1.25 a share
- 2006: $1.45 a share
- 2007: $1.95 a share
- 2008: $1.90 a share
- 2009: $0.95 a share
- 2010: $1.95 a share
- 2011: $2.70 a share
- 2012: $3.05 a share
The company's revenue growth has performed almost identically, increasing at an annualized rate of 17% over the past decade.
Qualcomm is far above the industry in nearly every key ratio. Its net profit margins have averaged 27.5% for the last five years. Its average return on assets during the same period is 11.3% compared with an industry average of 2%, while its average return on investments is 18.6% compared with an industry average of 5.4%.
This trend has been consistent for the past decade. Qualcomm has reported a return on equity of between 8.3% to 22.5% during the last 10 years. In eight of those years, the ROE was above 15%, which experts say is a quality benchmark for a company to achieve. Even more impressive is that the company hasn't needed to take on debt in order to achieve that high ROE.
Qualcomm has reported a return on assets in the range of 6.1% to 19.6% over the last decade, with an average of just under 14%. Return on assets is a measure of how much profit is generated from a company's assets independent of how much debt is used to finance the acquisition of those assets. The return on assets is sometimes a better measure of profitability than return on equity because the latter could be inflated by taking on more debt.
Speaking of its balance sheet, the company also boasts strength in that department. It has zero long-term or short-term debt and about $4 billion in cash. Its quick ratio, which is a measure of assets that are easy to liquidate over current liabilities, is 3. This means if the company had to pay off all of its liabilities immediately, it would only have to use a third of its cash and near-cash assets.
The big question is whether Qualcomm can sustain this growth rate and financial strength.
Shares of the company are trading at about $66, only $2 shy of its 52-week high and well above its 52-week low of $53. Some believe the stock could reach $75 to $80 or even higher by the end of this year. According to Thomson One, of the 43 ratings on the stock, 13 are strong buys and 24 are buys. Others say its strong growth rate demands a premium share price, which it currently does not have.
Strong demand for smartphones is helping the cellular baseband market, of which Qualcomm owns more than 50% market share. But the rapidly growing mobile device market has attracted a diverse set of semiconductor manufacturers who are all vying for a greater chunk of the high-growth, high-margin business in the coming years.
Those pessimistic about future growth believe the smartphone market on which Qualcomm depends is destined to flatten out eventually. If the company fails to see the trend well in advance, it could be stuck with excess inventory, as phone makers cut back on production due to slowing demand. Not to mention that Qualcomm's U.S. sales have remained flat between 2011 and 2012, with 80% of its revenue coming from China, South Korea and Taiwan. A slowdown in China would have a major impact on the company as a whole.
Detractors also point out that the company is largely betting on its new flagship product, the Snapdragon processor for smartphones. While the Snapdragon is installed on the Samsung Galaxy (running on the Google Android operating system), Nokia Lumia, and BlackBerry 10, it is conspicuously absent from the Apple iPhone.
As one company watcher put it, for Qualcomm to sustain its growth, it will need greater acceptance of the Google Android, BlackBerry 10, and Windows 8 operating systems, at the expense of Apple iOS. That means Google will have to increase its already industry leading 53% market share, while the others will somehow have to eat into Apple's 36% share. If Apple grows, or if BlackBerry grows at the expense of Google instead of Apple, then Qualcomm potentially loses.
On the flip side, many are enthusiastic about Qualcomm s recent announcement of its RF360 chip, a first-ever of its kind, that allows manufacturers to bring worldwide 4G LTE connectivity to all their mobile devices. Basically, the new chip is the equivalent of a skeleton key that can work on nearly every type of network.
Given its uniqueness, the RF360 could lead to an increase in Qualcomm's already growing revenue, meaning the industry's king could remain #1 for a long time.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This article was written by an analyst at Catalyst Investments.