Qualcomm (QCOM) has come under fire as the signs flashed red that high-end smartphones -- and, by extension, the modems and apps processors that Qualcomm ships into the majority of them -- have begun to see a slowdown. This, compounded by fears that for the first time starting in 2014 the company should have some serious competition in both LTE modems as well as high end apps processors, has led shares to get hit with downgrade after downgrade. This has made owning the shares rather frustrating. However, following some recent love from Lee Cooperman at the "Delivering Alpha" conference, coupled with a recent Wi-Fi win in the upcoming Samsung Galaxy S4 Mini, Qualcomm has appeared to regain some of its mojo. But is this run sustainable?
Momentum in Combo Chips -- Stepping On Broadcom's Turf?
As the high-end smartphone space gets saturated, there will be increased efforts from all of the major SoC vendors to consume more and more of the bill-of-materials for a given device. Broadcom (BRCM), a semiconductor company with an eclectic set of product offerings, derives a good 28%-30% of its sales from Wi-Fi/Bluetooth combo chips, and is widely regarded as the market leader in this space. However, it seems as if in Samsung's (GM:SSNLF) Galaxy S IV Mini, Qualcomm-Atheros won the design socket. The chip in the S4 Mini isn't as sophisticated as that in the standard S4, as it doesn't support the 802.11ac standard.
Market share gains, particularly in high-visibility designs in high-growth markets, are always a positive. And they easily could be contributing to the renewed momentum in the stock.
Tablet Momentum -- Something Big This Holiday?
Surprisingly enough, while Qualcomm's Snapdragon S4 series of chips has done beautifully in smartphones, it has failed to gain any meaningful traction in tablets thus far. However, the Snapdragon 600 and 800 processors are impressive. I expect to see substantial design win momentum going into the second half of the year based on the performance (and I'm assuming power) characteristics of Qualcomm's latest and greatest. While the Qualcomm parts will be going up against stiff competition from both Intel's (INTC) Bay Trail and Nvidia's (NVDA) Tegra 4, Texas Instruments' (TXN) exit from this space -- coupled with an increasing TAM -- only bodes well for the company.
LTE Share Loss Risks Remain
In addition to a slowing high-end market, there still is the nagging issue of share loss in the LTE modem space as competitors swarm in. While Qualcomm is likely to have a technically superior solution, it is tough to ignore that there will likely be ASP erosion going on in addition to share loss. Qualcomm's Paul Jacobs insists that the LTE market is growing fast enough such that if the company loses share, it can still see growth. But this could be a major cause of concern for investors.
Strong Dividend Growth Story and Balance Sheet
Fortunately, Qualcomm has a solid balance sheet with about $30 billion in cash and marketable securities and no long-term debt, and the company does not run a particularly capital intensive business. Furthermore, the major driver for EBIT is the firm's wireless patent licensing division, which helps to keep a steady revenue/income stream flowing while the firm takes on the highly competitive processor, modem, and connectivity businesses. Not only does this support the long-term dividend growth story (Qualcomm gets a percentage of every cellular-enabled mobile device sold), but it also serves to allow Qualcomm to really play hardball on the chip side of things without worrying too much about the financial implications.
While the stock has certainly been frustrating, it is one that I believe is tied to a fundamentally sound and well-run company. If you're looking for exposure to beaten down large-cap tech without too much drama, then Qualcomm is probably your best bet.