Qualcomm - Growth And Competition Concerns Are Overdone

| About: Qualcomm Inc. (QCOM)

Shares of Qualcomm (NASDAQ:QCOM) fell in the wake of its fourth quarter earnings results. While the results appear solid, the outlook for the first quarter and entire fiscal year of 2014 came in a bit short to consensus estimates.

The appealing valuation, growth prospects and solid returns to shareholders continue to outweigh concerns about competition and slower growth in my opinion.

I continue to like the long term prospects of the firm.

Fourth Quarter Results

Qualcomm generated fourth quarter revenues of $6.48 billion, up 33% on the year before. Revenues easily beat analysts expectations at $6.35 billion.

Net earnings rose by 18% to $1.82 billion as diluted earnings per share rose by a similar percentage to $1.05 per share. Analysts were looking for earnings of $1.08 per share.

Earnings growth took a beating on $173 million in charges related to the verdict of the litigation with ParkerVision, shaving off $0.10 per share in earnings. CEO and Chairman Paul Jacobs commented on the performance:

"I am very pleased with our record financial performance this year as we delivered revenues of $25 billion, up 30% versus last year. Our technologies underpin the global growth of wireless data, and our semiconductor solutions are used across the industry's flagship smartphones."

Looking Into The Results

MSM shipments came in at 190 million units which is up 35% on the year before, but down 10% from the seasonally strong third quarter.

Despite the strong results, the cost of production increased rapidly for Qualcomm. Cost of goods sold rose by 4% to 41.9% of total sales. A 2% drop in R&D expenses to still a hefty 20.8% of total revenues, and a 270 basis point drop in SG&A expenses, more than made up for the gross margin compression.

On the back of the litigation charges and lower investment income, earnings growth did not keep pace with revenue growth.

Looking Ahead

For the current first quarter of the fiscal 2014, Qualcomm is looking for revenues of $6.3-$6.9 billion which is up anywhere between 5 and 15% compared to last year. Shipments of MSM are seen between 195 and 210 million. Analysts were looking for revenues of $6.99 billion for the first quarter.

GAAP earnings are seen between $0.92 and $1.02 per share, down 6 to 16% from reported earnings of $1.09 per share last year.

Full year sales are seen between $26.0 and $27.5 billion, up between 5 and 11%. GAAP earnings are seen up by 9 to 14%, expected to come in between $4.25 and $4.45 per share. Analysts were looking for revenues of $27.5 billion.

While full year average selling prices are expected to fall slightly to $216-$230 per device, Qualcomm expects to ship a record of 1.26 billion devices.


Qualcomm ended the fiscal 2013 with $29.4 billion in cash, equivalents and marketable securities.

Revenues for the fiscal year of 2013 came in at $24.87 billion, up 30% on the year before. Operating earnings rose by 27% to $7.23 billion as net earnings rose by 12% to $6.85 billion.

Factoring in losses of 4% in after-hours trading, shares are trading around $67 per share. This values the firm around $115 billion, or around $85 billion when factoring in the net cash position.

As such, operating assets of the firm are valued around 3.4 times annual revenues and 12-13 times annual earnings.

Qualcomm currently pays a quarterly dividend of $0.35 per share, for an annual dividend yield of 2.1%.

Some Historical Perspective

Over the past decade shares of Qualcomm have roughly tripled. Shares have steadily risen from levels of $20 at the start of 2004 to levels of $70 per share before the release of the fourth quarter earnings. Note that shares are still trading below all time highs of around $90 set around the turn of the century.

Between the fiscal 2009 and 2013, Qualcomm has grown its annual revenues by nearly 150%, increasing from $10.4 billion to $24.9 billion. Net earnings more than quadrupled increasing from $1.6 billion to $6.8 billion in the meantime.

Investment Thesis

Investors are not impressed despite solid growth, very high earnings and a very strong balance sheet. Yet, Qualcomm is facing competition in Asia, which is limiting growth forwards, despite a continued adoption of smartphones across the globe.

Truth of the matter is that Qualcomm has dominant positions being a component supplier to Apple's (NASDAQ:AAPL) iPhone as well as the Galaxy line from Samsung Electronics (OTC:SSNGY). Next to that it receives a lot of revenues from licensing. With emerging markets, and notably China, driving growth forwards, less expensive phones could impact Qualcomm's earnings, as royalties are based on fixed percentages of selling prices.

Besides these pressures, network operations like Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) are aggressively pushing for LTE, with other chipmakers developing their own LTE chips, resulting in increased competition.

Yet Qualcomm continues to expect strong growth of 3G/4G devices across the world and notably in China with the anticipated launch of LTE. As part of a longer term outlook, Qualcomm expects double digit growth rates in revenues and earnings per share for the next five years.

On top of this come decent returns to shareholders. Over the past year, Qualcomm repurchased $4.6 billion worth of shares, while paying out $2.0 billion in dividends, resulting in a combined yield of nearly 6% to its shareholders at current levels. It is noteworthy that Qualcomm spent $3.3 billion of this year's of repurchases in the final quarter alone.

As such shares offer both growth potential, solid cash flows to shareholders, and all of this at a reasonable valuation.

Last year I last took a look at Qualcomm's prospects. Even when factoring in Thursday's losses, shares have gained some 10% over the past year, which is not excessive. Given the faster growth in earnings, the valuation has grown even more appealing. Higher dividends and an accelerated pace of repurchases have pushed up yields to shareholders, but for now investors seem worried about growth and increased competition.

I reiterate my stance, I still like the long term outlook for Qualcomm as it holds dominant positions in an industry poised for future growth.

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.