In many investment circles, Qualcomm (QCOM) has already been compared to Intel (INTC). As a chipmaker, Intel rode the coattails of Microsoft (MSFT) and the personal computer movement to emerge as a story stock through the 1990's. On October 26, 1999, both Microsoft and Intel were added as components to the Dow Jones Industrial Average, as a capstone to the PC revolution. Shortly thereafter, the personal computer investment sector degenerated into a commodity play. Over the past decade, Intel has done nothing but generate stable levels of cash flow, while also kicking out larger portions of profits to shareholders in the form of dividends. An August 7, 2013 report from research firm Gartner recently confirmed a 20% contraction of the PC market in Western Europe during the second calendar quarter. For Intel, the tide has not turned. Bolt on Windows upgrades have not spurred growth.
Most likely, Qualcomm will be the next Intel. Recent product busts out of both BlackBerry (BBRY) and Nokia (NOK) may serve as evidence that the mobile device market has already approached the maturation stage of the business cycle. Speculation concerning bankruptcy filings for both Nokia and BlackBerry can also erode bottom line profits at Qualcomm. As an effective lagging indicator, Qualcomm investors may be caught off guard when inventory starts to pile up within the warehouses of this chipmaker.
Consumer Electronics Duopoly
Qualcomm emerged as a silent wing of the Apple (AAPL) iOS - Google (GOOG) Android duopoly that has grown to control the consumer electronics market. Steve Jobs' Apple Way called for the in-house design of component parts. Apple A5 and A6 processors have powered the latest iPhone and iPad models, while iOS software formed the backbone integrating the entire ecosystem. Alternatively, Google bought and maintained the Android platform - to be openly shared with various original equipment makers and developers. To date, Samsung has leveraged its relationship with Android best to emerge as a leading original equipment maker for both tablets and handsets. Qualcomm's line of Snapdragon chips now powers the popular Samsung Galaxy phones and tablets. The Snapdragon is also the go-to processor for BlackBerry and Nokia machines. With the exemption of Apple, Qualcomm chips are the trusted engines driving the majority of mobile devices. Still, Nokia and BlackBerry have been unable to grow the consumer electronics market much beyond the iOS - Android duopoly.
On August 7, 2013, research firm comScore released its report summarizing June 2013 U.S. smart phone market subscriber share. The report presented averages of data taken for the quarter spanning between March 2013 and June 2013. During this latest quarter, Google Android and Apple iOS operating systems powered respective 52% and 40% shares of U.S. smart phone subscriptions. Meanwhile, Apple and Samsung both occupied the top two slots on the handset side of the ledger. At the bottom of the heap, BlackBerry and Microsoft Windows have been left to fight desperately over a meager 7.5% share of the smart phone market.
On August 5, 2013, International Data Corporation (IDC) released its analysis of a Q2 2013 tablet market that appeared eerily similar to the smart phone industry. Again, Apple and Samsung headlined this tablet market as the top two vendors. Taken together, Android and iOS operating systems dominated a 95% share of this market. The BlackBerry Playbook tablet is effectively a non-factor in this market, after having accounted for a mere 100,000 in unit sales during the latest calendar quarter. For the sake of comparison, Android tallied 28.2 million shipments during the same period.
BlackBerry and Nokia Busts
As standalone entities, no product out of BlackBerry or Nokia could compete against the Apple iOS - Google Android ecosystem. Apple has fused technology alongside art to introduce the revolutionary iPod, iMac, iPhone, and iPad platforms to market. Meanwhile, Google's minimalist design and "don't be evil" approach towards doing business has consistently driven traffic towards its dominant Search engines. Google has recently launched Glass, at the same time that BlackBerry and Nokia have been desperate to get a handle on the smart phone and tablet market.
Over the past year, Nokia has aggressively marketed the utility of its mapping applications and picture clarity of its Lumia camera sensors. Alternatively, BlackBerry promoted its Bridge program that smoothed transitions between this company's lineup of smart phones and tablets. The BlackBerry brand has traditionally played up its reputation for effective security features between business and social applications. Nokia and BlackBerry smart phones and tablets are also positioned as gateways into the Microsoft Office suite of Word, Excel, and Power Point. IDC data did indicate that Microsoft shipped 2 million Surface tablet units during Q2 2013. Rather than expanding the market, many of these sales may have come at the expense of the BlackBerry Playbook.
In recent quarterly reports, BlackBerry and Nokia have revealed shipments of 6.8 million and 7.4 million smart phones, respectively. For the sake of comparison, Apple shipped 31.2 million iPhones during a similar time frame. For now, Microsoft, BlackBerry, and Nokia each lack direction within the mobile device space. At the bottom of the scrap heap, these players have managed to cannibalize their own sales, which will ultimately subtract away from Qualcomm's bottom line through contagion. BlackBerry and Nokia shares have both traded for less than book value over the past year. Traders are effectively telegraphing that shareholder value would be preserved if these businesses were to be immediately broken up, instead of continuing to hemorrhage cash as going concerns. Obviously, a bankruptcy within this consumer electronics space would curtail demand for Qualcomm chips.
The Bottom Line
Over the past two years, Qualcomm has averaged 32% and 29% revenue and net income growth, respectively. For its 2012 fiscal year, Qualcomm took in $5.3 billion of net income off of $19 billion in revenue. On August 20, 2013, Qualcomm closed out the trading session at $66.72 per share - for $113.5 billion in market capitalization. This price level does value Qualcomm at 21 times trailing 2012 earnings. Legendary investor Peter Lynch often cited a price-to-earnings-to-growth ratio of less than one - to determine whether a stock was fairly valued. According to Lynch's metric, Qualcomm stock may be a bargain. I would advise that investors quit while they are ahead, and begin to dollar cost average out of this stock, with monthly sales until the end of this year. Second half mobile device sales may disappoint.
On July 24, 2013, Qualcomm announced third quarter fiscal 2013 results for period ended June 30, 2013. For Q3 2013, Qualcomm posted $1.58 billion in net income off $6.24 billion in revenue. Revenue and net income were both up by more than 30%, on a year-over-year basis. Net income, however, was down by 15%, when compared to the prior quarter. Qualcomm categorized its business lines simply according to MSM chip and 3G/4G device shipments. 3G/4G device shipment data was in reference to the licensing of wireless technology to several partners, including Apple. The data was not broken down further specifically according to vendor. As such, it is to be implied that a slowdown within the overall mobile device market would adversely affect sales and profits at Qualcomm. MSM chip and 3G/4G device shipments both declined on a sequential basis through this recent third quarter.
The trend is now towards smart phone and tablet product maturation within the industrialized world. The collapse of business at BlackBerry and Nokia may prove to be the proverbial canary in the coalmine marking the shift out of growth and into maturity for wireless. The 2008 bankruptcy of Gateway Computer confirmed that the PC was then a commodity. We have seen this movie once before - at Intel. Sell out of Qualcomm while the getting appears too good to be true.