It's time to buy more Qualcomm (QCOM) as it grows stronger vs. Intel (INTC) in the smartphone chipset arena, regardless of whether Apple (AAPL) or Samsung (GM:SSNLF) win share in the smartphone and mobile devices sales arenas. Here are the five reasons why I'd buy Qualcomm.
1. Market leader in the Smartphone Chipset Industry
Capitalizing on its intimate understanding of OFDMA technology (see point No. 2 below) and strong innovation focus, Qualcomm has gained substantial market share of more than 50% in the smartphone chipset industry. There will always be competition, but bear in mind that Qualcomm spends much more on R&D than the competitors in the middle segments, Broadcom (BRCM) and Nvidia (NVDA), do.
Strong innovation and R&D focus by Qualcomm:
R&D as % revenue
R&D (USD million)
The chipset giant Intel is trying to go head to head against Qualcomm. That is a concern on first glance due to Intel's enormous monetary resources, but both utilize entirely different CPU architecture. Qualcomm's chipset is designed based on reduced instruction set computing (RISC), whereas Intel utilizes complex instruction set computing (CISC). The essential difference between RISC and CISC is that RISC is single-clock, reduced instructions whereas CISC is multi-clock, complex instructions. Because of the reduced instructions, RISC requires fewer transistors than CISC. Despite the efficiency of RISC, CISC had a head start because the prevalent Windows is designed for CISC. Over the years, Intel has to overcome this efficiency disadvantage by having an extra step of converting CISC instructions to RISC instructions, but this conversion process requires additional energy. In short, Qualcomm's chipset is inherently more powerful than Intel's chipset.
The tide has turned ever since mobile devices outgrew PCs. The power of chipsets has structurally shifted from Intel to Qualcomm. Competition will always arise and there is no doubt that competitors can take some share of the low-end market, but Qualcomm will continue strengthening its technological leadership in the high-end segment. Just like Intel became a monopoly in the PC chipset industry, Qualcomm will continue monopolizing the mobile devices chipset industry.
2. Monopoly in the Wireless Communication Technologies.
Coming from a strong position in 2G and 3G with its CDMA technology, Qualcomm secures an even stronger position in 4G wireless communication technologies through its OFDMA patent portfolio. Evidently, OFDMA-based LTE has won over IEEE 802.16e-based WiMax in 4G because LTE is expected to offer more cost savings through its interoperability with 3G. Many WiMax operators are moving to LTE.
With a solid intellectual property portfolio, Qualcomm receives licensing revenue from more than 30 companies (including LG, Nokia, and Samsung) for the manufacture and sale of certain wireless products. Qualcomm will continue to benefit the mobile subscriber migration from 2G to 3G and multimode 3G/LTE. Given its monopoly position in the wireless communication technologies, this licensing revenue will continue to be a steady, growing source of revenue for at least the next three years.
3. One of the Best Proxies to World Smartphone and Mobile Devices Growth.
Due to the strong market share of the smartphone chipset and the monopoly in the wireless communication technologies, Qualcomm is one of the best proxies to world smartphone growth -- regardless of whether it is Apple or Samsung that wins share in smartphone and mobile devices sales. Qualcomm will grow with the world smartphone and mobile devices volume.
4. Earnings Momentum Has Reaccelerated on a Quarter-Over-Quarter Basis.
Share price was weak in the past year because the earnings momentum had not been great. However, the momentum has accelerated in the last quarter of Q1 2013. The 24.7% quarter-over-quarter revenue growth in Q1 2013 is much stronger than the 13.7% in Q1 2012, auguring well for earnings growth for the rest of the year.
Qualcomm quarterly growth on quarter-over-quarter basis:
Revenue growth q-o-q
Operating income growth q-o-q
5. P/E Has Declined to the Historical Low Level.
EPS growth is expected to reach 30% for 2013. At the current price of $66, Qualcomm is trading at a 17.5x P/E for FY 2013, which is near the lowest level in the past three years. Targeting 23x P/E, the target price is $87 with a 30% upside. Qualcomm P/E is declining, but is expected to rebound with the strong earnings momentum.
52-week high P/E
52-week low P/E
Strong fundamentals in the next three to five years, accelerating earnings momentum, and the historical low P/E level warrant a long position in Qualcomm for 30% upside.
On a side note, buying a beaten-down tech stock like Intel solely based on the high yield is risky. That's because a 10% share price drop due to disappointment in earnings will more than wipe out the 4% dividend yield. In order to go long Intel, for example, one must have a conviction in Intel's turnaround to satisfy a sufficient risk/reward ratio. A high yield, as the share price supports, typically works only for the stable stocks like consumer staples, REITs, and utilities.
Disclaimer: Third Mile is not a registered investment advisor or broker/dealer. All information contained herein is for general information purposes only and does not constitute any investment advice. Third Mile does not guarantee the accuracy or completeness of the information contained herein. Readers are solely responsible for their own investment decisions.