- Qualcomm has a huge ($200 billion) new frontier that should propel it to new heights.
- Bull-bear bickering could hold the stock down for a few quarters, but it's likely to be an excellent buy for long-term investors.
- Moore's Law is collapsing and has become an albatross around Intel's neck. By contrast, Qualcomm controls one of the few growing pies in technology--mobile.
A lot of bad press is coming out of Wall Street right now about mobile powerhouse Qualcomm (NASDAQ:QCOM).
Having ridden the stock to new highs, Qualcomm investors are being deafened by bear growling from respected tech analysts. Qualcomm's short interest also sharply increased just before earnings came out this year, as bets were placed against the stock.
On the other hand, analysts at Goldman Sachs just hoisted their price target on Qualcomm to $90.00. Analysts at Nomura also reiterated a "buy" rating on the stock a few days ago.
So what's an investor with a long-term horizon to do? Let bear pessimism scare you out of the mobile powerhouse? Or hope the shorts and general negativity will create an air pocket, so you can load up at a better price point?
Let's look at the bear case first.
The big knock on Qualcomm is that the company could feel the impact of high-end mobile market saturation and competition in 3G/4G chipsets in the coming years. Moreover, Qualcomm is facing an anti-monopoly probe in China that could dent royalty rates and limit its upside from China's 4G transition.
Every investment represents a risk, but it's important to be objective about the actual future of smartphone growth. If you believe (as I do) that smartphone technology is still in its infancy, problems in China and fears of declining high-end smartphone activations are way overblown. Worst case, they may clip Qualcomm's wings for a few quarters, but they won't hit the San Diego-based company in the gut.
Moreover, there's a huge growth driver coming for Qualcomm that isn't being taken into account.
Still, since it's easy to make mistakes in the type of high-altitude stock market we're floating through right now, let's trot Qualcomm's numbers out for a closer look.
Qualcomm has zero debt, posted revenue up 10% year over year in fiscal Q1 earnings, the stock is up-trending, but trading at just 20 times trailing 12-month GAAP earnings. The company gets the majority of its total revenue from chips, but the bulk of the profit comes from licensing technology, and its first quarter profit topped analyst estimates.
The company collected license fees on more than 1 million phones in fiscal 2013 and sold more than 700 million chips. In chip margins, along with revenue, Qualcomm is off to a great start this year. Chip sales were up 17%, which more than made up for a drop in average selling price (down 8%). In other words, to answer the bear argument, the company is successfully adjusting its product lineup to address any price pressures.
What about management?
Steve Mollenkopf, Qualcomm's new CEO, ushered in his tenure the right way--by returning more cash to shareholders. Qualcomm boosted its dividend by 20 percent a share and increased its stock buyback authorization to $7.8 billion. The move says that management is willing to reinvest in the stock, which is trading close to its all-time highs. The company is serious about maximizing shareholder value.
How about growth?
Qualcomm's growth rate has averaged 27% over the last 15 years, with expectations of 15% for the next five years. But in the past few years, the price has been slow to follow. Around June of 2013, Qualcomm's stock price started ramping up, but it still has a way to go to track revenue and earnings growth. Goldman Sachs' price target points to a potential upside of 17.32% from yesterday's close. Barron's sees the stock exceeding $90.
All of this sounds pretty good. But none of it explains why I strongly believe Qualcomm is one of the most exceptional stocks out there for investors. It's not often I'm as optimistic about any tech company as I am about Qualcomm. I've owned the stock for almost twenty-five years, and the only mistake I've made is not to buy more. I'm doing that now because I believe this company's best days lie ahead.
In Comparison to Intel, Qualcomm Has a Deep Competitive Moat
A few months ago, I wrote a piece for Seeking Alpha on why I sold Intel, titled: Intel: Don't be Left Holding the Bag. I'm not going to repeat that labor-intensive article, as it is easily accessible online. (Be sure to read the article comments, if you check it out. Seeking Alpha comments are typically worth reading at least as much as the articles.) But since Qualcomm is an ongoing threat to Intel (NASDAQ:INTC), and it is hard to understand Intel's future without also understanding Qualcomm, I'll present some new information for the sake of comparison.
Intel is at a crossroads, both as a company and with long-term investors. Its gain in 2013 was almost 30%, but the consensus price target for 2014 is below the current share price, with a drop of more than 5% expected in 2014. The possible drop is based partially on a warning that PC makers may cut production even further than expected this year. In the latest filing for Buffett's holding company Berkshire Hathaway, Buffett sold his entire stake in Intel.
Intel's stock is more or less stuck until the company proves it can recover from recent stumbles. Intel has no traction in the mobile space, and its business model has blocked it from emerging as a real competitor in mobile chips.
Intel's business model is driven by the company's adherence to Moore's Law. For four decades, Moore's Law led to constant improvements in computing power and gave Intel's long-term investors a juicy payoff.
But Moore's Law is hiccupping so badly these days even Intel executives said recently it's coming to an end. In fact, Moore's Law was never a provable law of science. It was merely an observation genius co-founder Gordon Moore made back in Intel's early days and his company committed itself to maintaining.
Unfortunately, Moore's "Law" is now an albatross around Intel's neck.
And here's where things get interesting.
If Intel disappeared tomorrow, the world would lose a lot of computational power. But its competitors would quickly snap up Intel's entire business.
What would happen if Qualcomm disappeared? In addition to losing some computational power, the world would lose something much more difficult to replace - the only game in town for wireless standards. There are no substitutes for CDMA and OFDMA standards, they are the core of the wireless communication business. Qualcomm owns the key patents to implement these standards, and that gives Qualcomm a unique competitive advantage - that prized Warren Buffett moat.
The bear case for Qualcomm requires believing smartphone sales will continue to slow. But that's a faulty assumption, based on the mistaken idea that a smartphone is the last node in the network. Qualcomm's future growth and continuing potential is based on something completely different - the belief that smartphones are only the next node, and there will soon be multiple nodes beneath them.
In fact, Qualcomm has made it clear that the company's objective is to move beyond powering its current sweet spot of smartphones and tablets, and move into every possible connected device from the living room to the garage.
A Huge New Frontier for Qualcomm: Health Care in the Palm of Your Hand
So let's get to the juice of this piece, that huge new frontier mentioned in the title.
What is it, and how big is it?
Most investors know that Qualcomm has already launched the Connected Home and the Connected Car, two monstrous trends that bring the native features of smartphones into the car and home.
It turns out that the most promising new industry for Qualcomm is something even bigger. An industry that is not only soaring in price but still wildly profitable despite Obamacare...American healthcare.
According to an estimate from the Emergo Group, the digital health revolution is worth around $6.5 trillion. (The number originated in the fifty-page white paper, "A Prospective Analysis of the Future of the U.S. Healthcare Industry," by Nicholas P. Vitalari, PhD. at UC Irvine.)
I'll sum up Vitalari's excellent paper in one half-sentence: what we're about to witness in health care is the concept of convergence, where technology and health care are coming together to spawn new industries.
A convergence between health and tech is music to Qualcomm's ears, because they have already decided who will be the biggest player in that new industry - themselves. Qualcomm's goal is to extend their dominance of communication standards into health - a field that is desperately in need of them. To further that goal, as well as create new revenue streams, they have launched the 2net Platform. 2net is a Qualcomm designed cloud-based system that collects health data from mobile devices, liberates the data so it becomes ubiquitous and delivers it on demand to physicians and caregivers.
Around 350 companies have designed health devices that currently work with 2net hub via short-range wireless systems. The hub forwards that data on to the company's private cloud over 3G cellular, so hospitals, patients and family members can use it.
In addition, Qualcomm is using their venture capital arm (Qualcomm Ventures) to invest and partner up with small companies who are developing sensors and diagnostics that connect with mobile phones. The goal is to provide real-time information that saves money and improves patient care.
An example of a mobile health product from one of Qualcomm's partners is the AliveCor, an ECG device that fits over the back of a smartphone, and monitors heart activity. The Delta (the product of another Qualcomm partner) is a wireless device worn on the chest to record, store and transmit ECG and motion data. Another device, iMPak, alerts the patient's care team when the patient's medication compliance is lacking.
Using sensors that monitor activity in a home and sensors that monitor an individual's vital signs, we can now remotely track things like overall health, medication compliance and physical activity. Having that technology and capability could change the way we view aging. It will certainly enable the elderly to stay in their homes and live independently longer.
Qualcomm's former CEO and current Chairman of the Board Paul Jacobs is the company's biggest champion of mobile health. Jacobs is the son of Qualcomm's founder, and the key architect of Qualcomm's vision. Jacobs often discusses the mighty payoff to everyone (especially Qualcomm) that will be found in mobile medicine. Jacobs believes smartphones and mobile technologies will soon transform the costly health care industry. In addition to monitoring vital signs, they will intersect with invasive devices ingested or embedded in the human body, to bring the benefits of wireless health to an even higher level.
The financial benefits are measurable. Chronic disease patients consume more than three-quarters of the 2.7 trillion spent on health care annually in the United States. Mobile technology promises to reduce those costs. Estimates are a reduction in mortality rates of up to 45 percent and a 20 percent reduction in emergency room admissions.
Looking ahead: The Risks
There are definite risks to owning Qualcomm's stock.
The stock price could blip up and down in the next few months, depending on the latest backyard brawl with companies like MediaTek, Broadcom (NASDAQ:BRCM), Marvell (NASDAQ:MRVL), Intel, Samsung (OTC:SSNLF) and Maxim (NASDAQ:MXIM). For example, Taiwanese chipmaker MediaTek could compete in the mid to low-tier category, but they are unlikely to challenge Qualcomm's command of the high-end mobile phone market.
Long-term, this competition will not stop Qualcomm's growth, so long as Qualcomm keeps giving consumers new reason to upgrade their mobile phones. Digital health opportunities will certainly provide that, but it will take commitment, talent and ingenuity to continue to build wireless products that successfully address health issues.
Will mobile phones soon become an agent for managing our health just as capably as they manage the rest of our lives? No one knows the future, but it seems likely that biometric sensors used with smartphones will change health care as we know it.
If so, the scale is tremendous, and no company stands to benefit more than Qualcomm.