There was bad news and good news in Qualcomm's (QCOM) report published on Wednesday afternoon. The bad news is disappointing full-year earnings guidance. The good news is that the company met earnings expectations on slightly better than expected revenues. What is even more remarkable is that Qualcomm continues to grow rapidly in such a challenging high-tech environment where winners quickly turn to losers and losers to winners. How does the company's leadership do it? What should investors do with the stock?
In a CNBC interview on November 9th, 2012, Qualcomm's CEO Paul Jacobs had the answer to the first question:
One thing I learned early in my career is that I don't make products for myself. I make them for my customers. We invest heavily in R&D, we get our capabilities ready, and we match the demand when it arises.
Simply put, Qualcomm wins by keeping a close eye on customers and coming up with products to accommodate their needs. That's how the company rides the one emerging trend after another, most notably the smartphone and the tablet industry where Qualcomm has been the main supplier of chips for both Apple (AAPL) and Samsung (SSNLF.PK).
Markets have already recognized Qualcomm's leadership in emerging technologies, pushing its stock close to new highs, which bring us to the second question. What should investors do with the stock?
It depends on the investment horizon of each individual investor. Short-term investors may want to stay away from the stock, as the disappointing guidance will limit any gains. Actually, the stock was trading lower in after hours. Long-term investors may want to stay with the stock as it offers better growth prospects than its peer, Intel (INTC).
Intel versus Qualcomm Financial Performance Statistics in 2012
Qtrly Earnings Growth (yoy):
Qtrly Revenue Growth (yoy):
Source: Yahoo Finance
- Size. With $20.46 billion in sales, Qualcomm is less than half of Intel's size. This means that the law of large numbers works better for Qualcomm, as do the laws of economies. While Qualcomm is at the threshold where returns scale takes full effect, Intel is approaching the threshold where constant or even decreasing returns to scale begin to kick in.
Better company fundamentals. As a pioneer of CDMA technology, Qualcomm enjoys the "first mover" advantage in wireless communications; and with the recent acquisition of Atheros Communications, Qualcomm strengthened its leadership in the industry.
Better industry fundamentals. While Intel remains the leader in the mature PC industry, (though Intel has made several moves into wireless communications in recent years) Qualcomm maintains leadership in wireless communications- still an emerging industry. Wireless Intelligence estimates that the number of 3G users will reach 2.8 billion by 2014.
Riding the industry upgrade cycle. Qualcomm is expected to be the main beneficiary of the wireless communication upgrade cycle. The GSM Association expects telecom providers to spend $100 billion by 2015 -in High-Speed Packet Access (HSPA), 3G, and 4G.
The Bottom Line: Intel is for value investors while Qualcomm is for growth investors.