We live in an increasingly mobile world. Mobile phone penetration in the United States is at 105% with smartphones making up a larger share by the day; however, the growth doesn't stop there. Many emerging markets are still adopting smartphones and have a long ramp up until 100%. Even then, many analysts foresee penetration blowing by 100%. Verizon (VZ) CEO Lowell McAdam explained that one reason why Verizon was buying out all of Verizon Wireless was the belief U.S. mobile penetration could zoom by 300% even reaching 500% as mobile machine to machine communication increases. For instance, if you leave for a vacation but forget to turn off the air condition, you could use your cell phone to adjust your thermostat, which would be connected to the mobile network. We're seeing other new mobile devices, like smartwatches that increase penetration. There are three ways to potentially profit from an increasingly mobile world.
The first, and perhaps most obvious, way is to own mobile network operators like Verizon, AT&T (T), Sprint (S), or T-Mobile (TMUS). There are two risks to this strategy. First with recent consolidation, the four carriers are stronger than they have been in over a decade, which makes a near-term price war a real possibility, threatening their 40+% margins. Second, increasing data usage requires increasing capital expenditure to build network capacity. In a lower-margin world, this revenue growth may not translate fully into profit growth. Each company has a compelling investment thesis, but given these issues, I wouldn't own an operator as a pure play on the mobile revolution.
A second strategy is to own a mobile device maker, for instance Google (GOOG) or Apple (AAPL). As consumers buy more and more mobile devices, whether they be phones, tables, or watches, manufacturers should see rapidly increasing sales. However as we have witnessed over the past five years, individual manufacturers have risen and fallen dramatically even as the overall market grew dramatically. Look no further than BlackBerry (BBRY) to see that owning a manufacturer to bet on a booming mobile market does not always work out. I'm not saying that you can't make money owning a phone maker, but because of their consumer element, they do not work as pure plays on the mobile revolution. You must have an underpinning thesis regarding their products and innovation to own a manufacturer.
That is why I see only one plausible pure play on the mobile revolution: Qualcomm (QCOM). Qualcomm has an unparalleled trove of intellectual property and gets paid whenever a mobile device is sold, no matter the manufacturer. It is also aggressively expanding its mobile breadth beyond phones as seen by Wednesday's release of the Toq. It is a smartwatch, basically it is a phone on your wrist. With several days of battery life, a proprietary screen, and full functionality, early reviews have been extremely positive. More importantly, this announcements should give investors confidence QCOM technology will remain dominant throughout the mobile world. With presence in virtually every mobile device, QCOM is a pure play on increasing mobile demand.
However, a good thesis isn't actionable unless the stock is appropriately valued, and in this case, I believe QCOM is an excellent play here. QCOM has been growing in the mid-teens for several years, and I believe the company can grow EPS upwards of 15% annually through 2020 as mobile sales show no sign of slowing down. In my base case, the company has at least $11 in earnings power by the end of the decade. At its current share price, the company is only trading 13.5x next year's earnings, absurdly low for a company with its growth trajectory. The company also has a massive $30 billion cash hoard. Ex-cash QCOM is trading at 10x earnings. This cash position gives QCOM ample resources to make acquisitions, buy back shares, and invest in R&D to maintain its top position in tech. QCOM is also one of the few growth technology companies that has a history of paying a dividend. It currently sports a 2% yield with ample room for continued growth in coming years.
We live in an increasingly mobile world. While there are many ways to bet on continued mobile adoption, many strategies have other risks. Qualcomm is the only true pure play on increased mobile usage. As seen by its smartwatch, QCOM remains on the cutting edge of mobile technology. The company is steeply undervalued at current levels with investors underappreciating its long growth runway. QCOM should trade at least 20 times earnings; I think QCOM should trade at $95-$100. With its pure play exposure to the mobile space, Qualcomm is my favorite technology stock for the long term.