What Analysts Keep On Missing About Qualcomm

| About: Qualcomm Inc. (QCOM)

Another quarter, another strong earnings report from San Diego-based Qualcomm (NASDAQ:QCOM). The company reported a 31 percent jump in earnings, raising the low end of its full-year revenue and earnings estimates at the same time. It now expects per-share income of $4.48 to $4.56 on revenue of $24.3 billion to $25 billion for the current fiscal year; the stock was up close to 3 percent in early afternoon trade.

Qualcomm's stellar performance should have come as a big surprise to analysts who have downgraded its stock recently. We are talking about Citigroup's removal of Qualcomm from the company's focus list, citing market saturation in the smartphone market. What should investors do?

It depends on the investment horizon and style of each investor. Short-term momentum-oriented investors may want to take some profits as the stock rallies after the report. Long-term value-oriented investors may want to stay with the stock, as the company has demonstrated a remarkable ability to re-invent itself by remaining customer-focused-as explained by the company's CEO Paul Jacobs in a CNBC interview:

"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-something analysts keep on missing. 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); and is better choice than Intel (NASDAQ:INTC) that has missed out on this trend-Intel reported disappointing results last week.

Intel versus Qualcomm Financial Performance Statistics in 2012

Intel

Qualcomm

Dividend

3.70%

2.30%

Operating Margins

25.18

30.78

Qtrly Earnings Growth(yoy):

-25.30%

-16.30%

Qtrly Revenue Growth(yoy):

-2.5%

23.90

Click to enlarge

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 reach2.8 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.

Disclosure: I am long QCOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Both long and short on AAPL with options