Anyone who has been around Wall Street long enough knows very well that investors should be skeptical of analyst recommendations, especially when it comes to technology companies that undergo their own cycles in addition to regular economic cycles. Back in 2000, technology companies like EMC (NYSE:EMC), Cisco Systems (NASDAQ:CSCO), and Sun Microsystems topped the "focus list" of almost every major investment firm on Wall Street. Now, thirteen years later, EMC and Cisco trade at a fraction of their 2000 highs, while Sun Microsystems was acquired by Oracle (NYSE:ORCL) for a few dollars a share several years ago.
The problem with these kind of recommendations is that they are usually momentum driven, and even if they are right on fundamentals, they come too late -- markets may have already discounted the cause for such recommendations. Evercore's downgrade of Intel, and Citigroup's removal of Qualcomm (NASDAQ:QCOM) from the company's focus list are two cases in point. Evercore cited weakening PC sales, while Citigroup cited saturation in the smartphone market. But aren't these trends expected? Haven't the two stocks discounted this expectation?
When it comes to technology leaders, the question for long-term investors isn't how traditional metrics like sales growth and profit margins have been fared in recent quarters, but whether these leaders continue to enjoy sustainable competitive advantage, the subject of the remainder of the article.
Intel enjoys four advantages:
1. An upgrade cycle. According to the Semiconductor Industry Association, global semiconductor sales totaled $25.73 billion in December, up 9.7% from April and 2% from the previous month.
2. Barriers to entry. Binding barriers to entry make the industry an oligopoly that allows Intel -- as a larger player -- to enjoy economies of scale while maintaining pricing power.
3. Successful transition from PCs to mobile devices. This happened with the introduction of new products like the Atom chip, which powers Windows 8 smartphones.
4. A change in leadership. This is usually followed by new strategic initiatives to improve both the top and bottom lines of the company.
5. Intel is to benefit from Microsoft's release of Windows 8.
6. Intel is to benefit with the introduction of its Silvermont Atom chips from the smartphone industry.
Analysts expect Intel to earn 39 cents for the last quarter on $12.89 billion revenues.
In a CNBC interview on November 9th, 2012, Qualcomm's CEO Paul Jacobs pointed to the primary source of the company's advantage:
"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 (NASDAQ:AAPL) and Samsung (OTC:SSNLF).
Analysts expect the company to earn $1.03 per share in the last quarter on $6.05 billions of revenues.
What should investors do?
It depends on the investment philosophy of each individual investor. Value investors should stay with Intel. Growth investors are better off with Qualcomm as it offers better growth prospects than Intel.
Intel versus Qualcomm Financial Performance Statistics in 2012
Qtrly Earnings Growth (yoy):
Qtrly Revenue Growth (yoy):
Source: Yahoo Finance
1. 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 to scale takes full effect, Intel is approaching the threshold where constant or even decreasing returns to scale begin to kick in.
2. 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.
3. 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.
4. 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. But growth and value should be part of every portfolio. That's why I own both stocks.