Qualcomm (QCOM) is the leading player in the digital communications products and services industry. Investors had their reservations when the company issued a lower than expectations guidance in the previous quarter. However, any reservations were blown away by the performance of the company in the second quarter. Qualcomm has shown robust growth in shipments as well as beating consensus estimates for earnings, revenue, as well as earnings per share. Therefore, Qualcomm presents an excellent long term buy and hold opportunity.
Qualcomm Incorporated (Qualcomm) is a USA-based global semiconductor company which is engaged in the manufacturing, designing and marketing of digital communication equipment. A specialist within the industry, Qualcomm operates within four different segments, and each business function department tries to cater to its requisite segment. The divisions are Qualcomm Technology Licensing [QTL], Qualcomm CDMA Technologies [QCT], Qualcomm Wireless & Internet [QWI] and Qualcomm Strategic Initiatives [QSI]. In many ways, Qualcomm has penetrated the digital communications market to quite an extent, from providing processors for smartphones to offering communications service products like QChat to wireless operators.
With the barrage of smartphones that we see in the market today, the possibilities for Qualcomm are only growing, and how it manages these opportunities is what will decide how well it performs in the market in the future.
An undervalued stock
Qualcomm has a Forward P/E 13.59x against a market average of 15x and an industry (Communication Equipment) average P/E of 98x. These comparatively cheap valuations are an indicator that the prices might rise in the future.
All aside, the Qualcomm stock is still undervalued; one of the major reasons for this could be attributed to the decline in the average selling price [ASP] of mobile devices. Since Qualcomm is a major player in the mobile device market, a fall in the prices of phones and especially smartphones could be perceived as a risk alarm by investors. However, despite the decline in the ASP of mobile devices, Qualcomm experienced a revenue growth of 35% YoY, which illustrates the minimal effect that this factor had on the health of Qualcomm as well as its stock.
Another factor that could have added to the undervaluation of its stock was the issuance of low guidance in the previous quarter. This gave rise to industry fears that Qualcomm might not be able to sustain its growth trajectory. This is one of the primary reasons the shares fell below $60 in July, but have bounced back since then.
Another major sign of concern for Qualcomm investors is the continuous selling by insiders and institutional investors. In the last six months, insiders have sold almost 2.4 million shares. This reduces total insider holdings by 10%. Institutional investors have also sold approximately 26 million shares, reducing institutional holdings by approximately 2%.
Despite all the pessimistic perceptions of the investors, the Qualcomm stock has a fair chance of having an increase in its price pertaining to a number of positive factors that are expected to benefit the company.
Qualcomm has every reason to be pleased with the current Apple (AAPL) and Samsung cut-throat competition in the mobile device market. Both employing Qualcomm chips in their devices, Qualcomm has been benefiting so far in their competition, and would do so in the future too. A pursuit to create an ever better and appealing device by both the rivals enables Qualcomm to keep producing and consequently selling better and more efficient products to both the companies. Not only that, but Qualcomm too is putting in its best efforts to make its chips the top choice for the two market leaders, which would also attract and encourage other mobile companies to buy from Qualcomm.
Rumors say that Apple could be launching new products by the end of the year, which could include a newer iPad, and even better, a budget iPhone. This could result in a rise in sales for Apple, and therefore, a company benefiting equally from good sales of the Apple devices would be its chip architect - Qualcomm.
Another positive for Qualcomm is its introduction of a chip that works on a number of frequencies simultaneously. This could benefit a lot of mobile phone manufacturers and hence Qualcomm. An important gainer of this technology would indisputably be Apple, which has been in need of such an ingredient to its much famed iphone to be able to tap more strongly and grow further into the Chinese market. This technology could thus prove to be a winner for Qualcomm in the days to come.
Qualcomm has also shown an achievement by winning fifty design wins for its Snapdragon 600 and 800 GPUs, one of which has been Microsoft's (MSFT) tablet. Microsoft announced that the newer Windows RT tablets would employ Qualcomm's Snapdragon 800 chip. Another event that boosted the image of Qualcomm was a shift from Nvidia's (NVDA) Tegra to Qualcomm's Snapdragon Pro by the Google (GOOG) Nexus 7 tablet. Qualcomm has claimed that its Snapdragon 800 provides better graphics than the new Tegra 4 GPU. However, Qualcomm might be up against a solid challenge when Nvidia launches its Tegra 5 chip, which would be employing the Kepler core with its impeccable performance to a mobile device for the first time.
Therefore, while it is true that the cut throat competition in the smartphone industry is encouraging price-based competition, this only benefits semi-conductor companies like Qualcomm. This is because the competition is shifting from 'design based differentiation' to 'feature based differentiation'. This increases the bargaining power of semiconductor companies and also increases their margins, because they can charge higher prices for products. This is why, despite the declining smartphone prices; Qualcomm will continue to witness margin expansion.
Considering the above mentioned factors that could benefit Qualcomm in the days to come, its stock price is very likely to rise in the future.
Qualcomm could greatly benefit from the growing demand for LTE enabled mobile phones after the success of the Samsung Galaxy S4 LTE. A decision by Apple to launch a budget iphone - as the rumors say - could be of huge benefit to the chip manufacturer. An increase in the demand for smartphones has been seen, and thus, Qualcomm could benefit from it despite a decline in the ASP of mobile devices. Moreover, the more countries shift from 2G to 3G and 4G, the more beneficial it is for Qualcomm as the demand for its more advanced chips employed in mobile handsets would increase. However, if developing markets fail to keep up pace with the developed markets in employing 3G or 4G networks, the demand for smartphones could experience a decline. Likewise, Qualcomm's chips would suffer a demand drop and so would its sales.
Qualcomm has a stronghold in the industry at present. However the mobile device industry is very dynamic and fast-paced. Thus in order for any player to keep its advantage in the competitive arena, it must devote ample attention to the changing dynamics of the industry as well as the demand patterns, and accordingly formulate and modify its R&D to suit the needs of both the company and the industry. The company has continuously increased its R&D budget the match to growing demands of customers.
The global economic environment has seen a lot of volatility lately, and like any other industry, it has had its adverse effects on the telecommunications industry. If any of Qualcomm's client companies suffer, Qualcomm suffers too. Qualcomm could also be at a risk of suffering reduced demand for its chips as a result of reduced demand for telecom products pertaining to the volatile environment. Therefore, it is always better to play safe in such environments. While Qualcomm develops and creates much highly developed products for high end mobile devices, it needs to keep ample focus on CDMA/OFDMA-based network technologies. This would help Qualcomm operate in a safer environment even when the odds are against the advanced mobile devices industry.
Qualcomm has proven its mettle in the past too, and in my opinion, it would fare well in the future too, considering its cash position and the attention it dedicates to research and development. Even though Qualcomm has a strong position in the industry, its competitors are not far behind and keep giving it a hard time from time to time. The new Intel (INTC) Haswell processors can impact the handheld industry and also threaten the market share of Qualcomm.
Therefore, in my opinion, Qualcomm is an excellent long-term investment. The company will benefit from the increased competition between major handheld players and continue to benefit with entry of new players like Microsoft's Surface tablets.