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Qualcomm (NASDAQ:QCOM) specializes in wireless communications, semiconductors, system software and a variety of hardware based on CDMA and OFDMA protocols. The company has managed to generate large and consistently growing sales and revenues in the last several years, indicating wise management and likely future growth. Though Qualcomm has overall strong fundamentals that merit a "Buy" recommendation, investors should be aware of some important caveats about Qualcomm's cost of revenue as well as the economic and legal environment in which the company operates.

Competitive Environment and Sales Growth
Qualcomm's expertise in graphics processing units (GPUs) results in its graphics chips appearing in many smartphones, game consoles and tablets. In the first half of 2013 (1H13), Qualcomm led 20 prominent worldwide semiconductor producers in sales growth. In 1H13, Qualcomm recorded 8138 semiconductors sold, a 37% sales growth since 1H12. Only South Korea's SK Hynix had a higher growth rate of 38% with 6098 semiconductor sales.(Ciol). Other well-known Qualcomm competitors did not do so well. Consider the following semiconductor 1H13 total semiconductor sales and the corresponding sales growth rates between 1H13 and 1H12 for some famous companies:

  • Micron: 4594; 9%
  • Samsung: 15,723; 4%
  • Intel: 23,340; -4 %
  • Sony: 2197; -26%

These results provide two reasons for optimism. First, Qualcomm benefited from a large growth rate unmatched by 18 major competitors. The second involves total units sold. Samsung and Intel are struggling to maintain growth despite their large sales numbers. Qualcomm has the chance, resources and expertise to grab a much larger share of the semiconductor market.

Recent iPhone Sales
In a further boost to Qualcomm, the latest iPhone sales have shown a brisk start. Apple (NASDAQ:AAPL) recorded unusually large sales resulting in a supply crunch. Though deliveries and sales went smoothly, customer demand jumped far beyond what was expected. Qualcomm's components in those devices include critical 4G chips that enable iPhones' excellent performance. Therefore, if Apple's iPhones sell better than expected, one of Qualcomm's important revenue streams gets a corresponding boost.

Overview of Financial Statements
Financial statements generally reinforced news and Qualcomm's position in the market to reinforce the company's allure for investors. Qualcomm's most recent balance sheet showed virtually unchanged YoY liabilities while total assets went up 18.1%. This fact played a dominant role in boosting FY 2012 total stockholder equity to 33.545M, up 24.37% from the previous fiscal year. Other financial indicators also gave bullish hints about the company.

However, it is not all good news. The last three fiscal years saw Qualcomm's cost of revenue increase as a percentage of total revenue, from 30% in FY 2010 to 37.1% in FY 2012. If cost of revenue continues increasing, Qualcomm could face difficult choices in a few years. (Yahoo Finance).

Risk Factors
Prominent technology companies such as Qualcomm generate substantial revenues from patents and licenses. Changes in patent law, litigation and court decisions can have a surprisingly large impact on Qualcomm. This factor is complicated by the company's international scope. Qualcomm has research and manufacturing facilities in India, Taiwan, Israel and Mexico, among other places. Relevant laws and regulations in any of those countries may result in the company saddled with a surprisingly weakened intellectual property position vis-a-vis Qualcomm's competitors. Qualcomm's other big systemic risk is its dependence on technical talent. Like many U.S. technology companies with international reach, Qualcomm brings in many overseas engineers and scientists on H-1B visas on a project-by-project basis, reducing labor costs.

Summary
QCOM stock is likely to reward equity investors. Qualcomm has strong fundamentals, lucrative partnerships with mobile market giants such as Apple and a record of impressive semiconductor sales growth that ranks over and above what competitors have delivered. The company's financial statements show the company has growing stockholder equity and earnings per share without substantial cuts to company operations. Risks to Qualcomm center on legal treatment of intellectual property and H-1B visa immigration laws. Notwithstanding potential risks and uncertainties, Qualcomm's fundamentals justify buying QCOM stock for medium and long-term investment horizons.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Qualcomm A 'Buy' Due To Sales Growth And Cost Control