Qualcomm: A Promising Leader in Mobile Internet 9 comments
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With the seemingly unstoppable rise in equities since March, it is becoming increasingly difficult to find good entry points for new positions. There are several trends - particularly in commodities and tech - that have been working and will continue to outperform as long as this rally lasts. Within technology, there is a market that will continue to expand despite any equity reversal that may await us: smart phones and mobile computing. Qualcomm (QCOM) is a key player in both and appears poised to benefit from this ever-growing market. More importantly, it has lagged the sector ETF (SMH) by over 28% in the last six months, providing an attractive point of entry.
Areas of Focus
One of Qualcomm's core revenue sources is its ownership of CDMA technology, which is widely used in 3G mobile phones throughout the world. With the impending transition to 4G approaching, analysts have expressed concerns at the limited life expectancy of this revenue stream. Though Qualcomm is not as entrenched in this next-generation technology, it has been expanding other aspects of its business in anticipation of these changes.
One key part of this plan is developing and promoting their new Snapdragon processors, which allow for more slim and efficient mobile devices. This will enable the upcoming wave of new smart phones, smartbooks, and netbooks to play rich multimedia content more efficiently while preserving precious battery life [Editor's Note: Lawyers for Smartbook AG indicated that they are the owner of the word mark "Smartbook" for computers and laptops in Europe, Australia, Korea, Russia and Singapore.]. In such a critical period of growth for these types of products, it is imperative for Qualcomm's future revenue growth that they establish themselves as reliable leaders in cutting-edge chipsets. Already, companies such as Toshiba (TOSBF.PK) are planning to use the Snapdragon chipsets in their new mobile internet devices.
In addition to more efficient hardware, Qualcomm has increased its focus on access to multimedia. One example is their partnership with Adobe (ADBE) to create the BREW Mobile Platform, which incorporates Adobe's new Flash Player 10.1. This will equip new mobile internet devices to access more multimedia content than their predecessors, including Apple's (AAPL) iPhone, which has no such agreement with Adobe at this time. (Lack of access to Flash content has been a primary complaint of iPhone users since the phone's debut.) Another key development is their MediaFLO technology, which uses old analog TV frequencies to send digital video content from NBC, ESPN, and other major providers to mobile devices. This has already been adopted in certain handsets from Verizon (VZ) and AT&T (T), but Qualcomm is releasing their own handheld FLO TV devices this fall.
Finally, Qualcomm is developing a new "mirasol" display technology that, although not ready for widespread use, holds a lot of promise for future devices. These displays are based on nanotechnology and are extremely efficient and reflective, allowing for both indoor and outdoor use and much longer battery life than typical displays. It is rumored that this display technology will usher in the next wave of e-book readers, possibly even one produced by Qualcomm.
Legal Issues
One of the primary reasons for the stock's underperformance relative to the sector and the market has been its legal issues. In June of this year, Qualcomm's long legal battle with the Korean Fair Trade Commission resulted in a hefty $208 million fine levied against the company. This record-setting fine exceeded expectations, set a dangerous precedent for the company's pending legal issues, and was a significant blow to the company. The news came on the heels of a settlement with Broadcom Corp (BRCM) in April of this year that resulted in an agreement to pay over $891 million to Broadcom over a period of four years. These issues all came about as a result of Qualcomm's monopoly in CDMA technology with accusations that they had abused their competitive advantage. Qualcomm has several other legal conflicts that are still pending and could result in more losses.
The Numbers
Qualcomm has projected revenue of 10.25 to 10.45 billion for FY 2009, while analysts expect revenue of 10.33 to 10.60 billion per Reuters estimates. The company reports Q4 2009 earnings on November 4, and analysts expect earnings of $1.78 per share for FY 2009. At its current price of $41.88, that would amount to a P/E ratio of 23.5. In addition, if the same P/E of 23.5 is applied to next year's consensus EPS estimate ($2.38), a price target of $56 is estimated for the stock -- a very respectable gain of 33.7% in 12 months.
Last quarter, the company narrowly beat consensus analyst estimates for EPS ($0.42 vs. $0.40), but gave very cautious guidance for the upcoming quarter due to the macroeconomic situation. Assuming the positive economic indicators that have been released since July are not red herrings, there is room for both a moderate upside surprise and a possible raise of revenue guidance for next quarter when they report on November 4.
The Stock
As previously mentioned, Qualcomm shares have lagged, declining from their 52-week high of $48.72 on 7/23/09 to their current price of $41.88. In the short-term, they will most likely react proportionally to Intel's (INTC) results after the closing bell on Tuesday. Intel had an impressive run last week into earnings on speculation that they will not only beat EPS estimates, but will also increase revenue guidance for the upcoming quarter. This would likely provide a short-term bounce in the share price for chip stocks including Qualcomm. (Barron's has an article in this week's magazine discussing this scenario as it relates to the chip sector.) On the contrary, a disappointment from Intel would shake the entire sector, likely causing a further decline in Qualcomm shares.
Technically, as you can see in the graph below, it appears that Qualcomm has moderate short-term support at around $39.60. This should help keep a decline from extending very far below $40, but would not be much protection in the event of a broad market sell-off. I plan to initiate a long position in Qualcomm at market open on Tuesday before Intel reports earnings with the intention of adding to my position in the event of a decline.
Long term, as I stated above, FY 2010 and beyond appear to be extremely favorable for many stocks in the chip sector. However, unlike Qualcomm, many of those stocks have already priced in this kind of a recovery and thus have less upside. For the reasons stated above (and several more that I did not mention), I believe Qualcomm is positioned to exit this recession and enter the age of mobile internet as a market leader.
Disclosure: I currently have no positions in any of the stocks mentioned in this article.
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It's a little late to be getting in now, and the reason Qualcom is lagging is that it's not a good buy.
I haven't seen anything is remotely capable of replace or displace iPhone. Apple has the right idea to keep flash off the iPhone. The main actual use for it is youtube, and all that works great on the iPhone since they have implemented server side technology that converts Flash to H264 on the fly.
The only other 'use' for flash is banner ads, which are incredibly annoying and are only slowing down your computer. Best to turn it off in your browser.
Good luck pumping Qualcom.
CDMA/WCDMA is not just "widely used, but totally used in all 3G and QCOM gets royalties on everything that it doesn't sell with it's own incomparable 3G chips. Incomparable because no other chip vendor has anything like the "Gobi" chip that works on all major cellcos in the USA, (yep, VZW, AT&T, Sprint & T-Mobile) and most cellcos in the rest of the world.
Finally, the only thing a potential investor needs to know about QCOM in addition to them profiting from all 3G is that of the ~4 billion cellfone accounts in the globe now, only around 1 billion are 3G. All the cellcos who can afford the capex will install 3G and stop selling 2G kit to be able to make more money. That's growth potential. And, oh yes, there will eventually be somewhere around 4-5X the number of cellfones in M2M (machine to machine) modules using the 3G networks for industrial equipment monitoring and consumer devices such as e-book readers from Amazon and others.
Cheers
Close follower of QCOM in San Diego
PS: Do you know anything about Binary Runtime Environment for Wireless, or BREW?
While I agree that 3G still sees growth potential, particularly in emerging cell phone markets that are still upgrading to 3G technology, long term growth has been questioned due to the eventual transition to 4G technology - an area where Qualcomm has far less entrenchment. This is why I focused on Qualcomm's other very exciting ventures, especially it's Snapdragon chipset, which could become a standard for future smartphones, smartbooks, and netbooks.
As for brewer, he has done nothing but pump Apple incessantly and obsessively during his time on the site, so don't expect him to give Qualcomm any recognition.
On Oct 12 12:50 AM San Diego QCOM watcher wrote:
> "brewer" Neither you nor Stock Doc seem to understand that QCOM owns
> the essential IP for all 3G, including the iP3Gs. Stock Doc understated
> QCOM's position with "One of Qualcomm's core revenue sources is its
> ownership of CDMA technology, which is widely used in 3G mobile phones
> throughout the world."
> CDMA/WCDMA is not just "widely used, but totally used in all 3G and
> QCOM gets royalties on everything that it doesn't sell with it's
> own incomparable 3G chips. Incomparable because no other chip vendor
> has anything like the "Gobi" chip that works on all major cellcos
> in the USA, (yep, VZW, AT&T, Sprint & T-Mobile) and most
> cellcos in the rest of the world.
> Finally, the only thing a potential investor needs to know about
> QCOM in addition to them profiting from all 3G is that of the ~4
> billion cellfone accounts in the globe now, only around 1 billion
> are 3G. All the cellcos who can afford the capex will install 3G
> and stop selling 2G kit to be able to make more money. That's growth
> potential. And, oh yes, there will eventually be somewhere around
> 4-5X the number of cellfones in M2M (machine to machine) modules
> using the 3G networks for industrial equipment monitoring and consumer
> devices such as e-book readers from Amazon and others.
>
> Cheers
> Close follower of QCOM in San Diego
> PS: Do you know anything about Binary Runtime Environment for Wireless,
> or BREW?
Stock Doc- QCOM's bulk revenue comes from selling CDMA processors combined with IP portfolio of CDMA technology. As everyone knows, CDMA is not as widely adopted as GSM in high growth countries like China and India. The Jacobs (father and son) have so far milked all hand set makers with their excessive CDMA royalty, but failed to push innovation within Qualcomm. The Jacobs' excesses led to hefty settlements with Broadcom and S.Korean Trade Commission. All hand set vendors have clearly drifted towards GSM because worldwide adoption of this technology is quite smooth w/o big royalties. Now QCOM's release of its own MediaFLO handset is a big gamble. How many users are going to shell out $250 to buy a dedicated mobile TV handset just to watch television? Jacobs' have got this idea completely reversed. Unfortunately MediaFLO may die prematurely, because of Jacobs' greed. The BREW platform may succeed, but we are now seeing big mobile OS battles between Windows, Android, PalmOS and Symbian, besides MacOS. Can BREW make inroads here? I am not confident. Jacobs can continue to milk Verizon until CDMA is used in US for few more years. The rest of the world would have moved to 4G using GSM technology. Steve Jobs is very clever not to fall for Jacob's arm twisting CDMA contracts and Apple may never release an iPhone on Verizon. iPhone may eventually be a GSM only device.
Globally, there is absolutely no currently defined standard for "4G." A while back, the sanctioning authority, ITU, designated WiMAX as a 3G technology and LTE has not been sanctioned at all, as far as my research has shown. I do, however, expect LTE to be designated a 4G standard, but WiMAX is questionable because of a couple of issues. First, the major USA WiMAX company is Clearwire which deployed the IEEE 802.16d version, which is fixed, not mobile wireless... a sort of WiFi on steroids. Sprint, Intel, Samsung, Clearwire and others have joined forces and money to deploy IEEE 802.16e, which is mobile and, almost never mentioned in any media or analyst coverage, NOT compatible with 802.16d. That complicates chips for consumer devices that expect to work at home/office on the fixed WiMAX and also work as a mobile device. I seriously doubt that WiMAX will ever be competitive in developed markest such as the Americas and Europe because there are billions of dollars alread invested in 2G/3G infrastructure that is not yet fully amortized. Upgrades to 3G are and will be software/circuit board upgrades, while WiMAX requires "forklift," new, although fewer, towers, equipment and "backhaul" from the tower to landlines and Internet connections. That's expensive. We are in a global recession. Read some of the independent reports of users in Sprint's Portland, OR, & Baltomore deployments and you'll find it's not working anywhere nearly as well as promised. 3G works & will work ever better as more data demand is offloaded to LTE in a couple of years.
More on, "4G," one must note that "2G" began in a previous century (1990s) and is still selling strong until global cellcos follow the Koreans and Japanese by ending sales of 2G devices, because 3G provides much more voice and data capacity on a network. About the only data service that can be sold on a 2G device is SMS (texting) and ringtones. Cellcos in the USA & Europe are seeing dramatic growth of revenue selling data on 3G devices, but this is only the beginning. AT&T is already running into problems with the Apple iPhone sucking up about 40% of it's network resources with only about 10% of the subscriber base. AT&T says it's not going into LTE until 2011 or so, and they're spending buckets of money to upgrade their 3G footprint to avoid the debacle the previous company (of the same name) had when they couldn't deal with number portability in a timely fashion.
My point here is that 3G is still in relative infancy as a breakthrough technology and my guess is that it will have at least the roughly 20-year life that 2G is close to ending. Subscribers will not end 2G; it's the cellcos who will stop selling the devices which can't produce anywhere near the revenues as 3G kit. The major reason that 3G will have a long life, probably longer than 2G, is that voice capacity has increased dramatically with cdma2K 1xEVDO Rev A & WCDMA/HSPA+ and LTE could be used by the cellcos to handle most of the data services. Additionally, as I hinted in my previous post, M2M (machine to machine) non-voice devices will eventually exceed the numbers of 3G voice devices by many multiples.
What all of this means to QCOM is that it's 3G revenues and profits are only just beginning. Furthermore, QCOM has significant, if not dominating patents on OFDM, which will be eventually santioned by the ITU as "4G," which promises a nice future stream of revenues from royalties and selling chips. QCOM has already been signing up vendors to use its OFDM patent portfolio.
During the next year, we will see how successful QCOM's Snapdragon apps processor with a 3G radio will compete with Intel's dominance in "netbooks" and their own challenge to QCOM & TXN in smartfones. We shall see.
By the way, the following poster, "rajsekar" needs to educate himself about "GSM." That's a marketing term, like "UMTS," which are euphemisms for the actual technologies, TDMA (time division multiple access) & WCDMA (wide-band CDMA) respectively. His assertion that "... iPhone may eventually be a GSM only device." is just evidence of his ignorance of wireless technology. GSM (TDMA) has no technical connection to 3G (WCDMA), nor LTE (OFDM). GSM is a legacy technology like analog that the cellcos have to support until all the 2G subscribers are dead or have upgraded to 3G kit. One can always detect an ignoramous who asserts that GSM has anything to do with the evolution of wireless, whether voice or data. The FCC has shut down analog wireless telephony and TV and the cellcos will, within a couple of years, place GSM in the same graveyard and wireless radio chips will be a bit less complicated. If "rajsekar" would do a bit more research, he might find that the reason the Asians couldn't compete in Europe with GSM handsets for a decade or so was that the royalty rates were about five times what QCOM was estimated to be charging (~5% on wholesale price of a cellfone). QCOM's much lower royalty rates have allowed 3G to grow much faster than 2G/GSM did in Europe. The final evidence of "rajsekar's" ignorance is this statement: "The rest of the world would have moved to 4G using GSM technology." Hmm. That's about like saying that inter-planetary travel will use steam engines.
Finally, I'm not a QCOM employee, but am an investor in the stock and follow the technology VERY closely.
San Diego QCOM Watcher
Doesn't anyone find it ironic that you castigate me for recommending AAPL, which is up 225% this year, and yet you recommend QCOM which is up a PATHETIC 16%. Next year could be different, sure, but I seriously doubt it. What were you recommending last year? How has it done?
And you are a professional and I am just an investor. I find that rather hilarious. Good luck, because QCOM is probably headed DOWN, like it's been doing since JULY already.
Try investing in something you actually understand.
@SanDiego Q: BREW is better not discussed, since it's irrelevant. That is not the source of my handle here.
@rajsekar: Apple has not employed me to do anything. I am only trying to tell you that it's one of the best stocks on the net, I have made tons from it. But I guess you aren't into investing to make money? So look for stupid, baseless examples to try to show the iPhone isn't the rock star we all know it is, and cite India and Russia, etc... in a bizarre attempt to discredit it.
Making money in the stock market isn't that hard. Stay away from losers like QCOM and stock 'experts' who would recommend it (trying to take your money, no doubt). Listen to investors who have made money and know what stocks are great long term investments, or do your OWN research.
Personally, fearing such a pullback is inevitable, I have pared back my holdings in many names, including this one. I have locked in my gains thus far and currently have no position in this stock. However, I plan to begin building a position again when the stock reaches $45.00/share. If the stock never drops that far, I will reevaluate for a new point of entry.