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Summary

  • Qualcomm has got off to a strong start this year and looks set for an earnings beat.
  • Growth in smartphones across the world, especially the emerging markets, is a big growth driver for Qualcomm.
  • Qualcomm has a very strong balance sheet and analysts’ growth projections look strong, making it a solid buy for the long run.

Chipmaker Qualcomm (NASDAQ:QCOM) has started the year strongly with gains of more than 10%. The stock trades close to its 52-week high and there are good chances that its terrific performance will continue going forward. Qualcomm is slated to report its second-quarter earnings report on April 23. In this article, we will take a look at what's expected of Qualcomm and why its outlook seems strong.

Analysts' expectations

According to Yahoo Finance, analysts expect Qualcomm to post revenue of $6.48 billion. This would be an increase of almost 6% from the year-ago quarter. On the earnings side, Qualcomm is expected to post a figure of $1.22 per share, an increase from the $1.17 it reported in the year-ago quarter.

Qualcomm should be able to at least meet these estimates, since the company had reaffirmed its guidance when it reported earnings last time. The company's performance is expected to be driven by growth in the emerging markets, especially China, where the number of 4G handsets are expected to grow at a terrific pace going forward.

Qualcomm has a relatively good record of posting solid earnings numbers, missing just once in the last four quarters. It looks like this positive trend will continue going forward due to the numerous opportunities that lie ahead for the company.

Gauging the outlook

Qualcomm is seeing solid traction in both CDMA technologies and technology licensing businesses. As sales of devices using its technology are growing by the day, the company's licensing business put in a record performance last quarter. The royalty revenue is expected to continue growing strongly on the back of increased adoption of smartphones across the globe.

The emerging markets are expected to be the prime drivers of smartphone shipment growth. According to Gartner, smartphone shipments are expected to grow at an annual rate of almost 30% between 2012 and 2017 in the emerging markets. Globally, Gartner expects approximately 7 billion smartphones to be shipped until 2017.

Since Qualcomm supplies processors and radio chips that are used to run software in smartphones and connect them to cellular networks, growth in this region should help it continue its strong run in the future.

Qualcomm is aggressively looking to capture the exciting business opportunity presented by the LTE launch in China. With 4G spectrum licenses now issued, it is working closely with operators as well as domestic and international OEMs to meet this new growth opportunity. According to IHS iSuppli (via Phone Arena), the number of 4G phones shipped to China is expected to soar from 4.6 million units in 2013 to 72.6 million this year, 144 million in 2015, 220 million in 2016, and 300 million in 2017. Hence, Qualcomm has got solid opportunity ahead of it.

Qualcomm's focus on multi-mode 3G LTE modems and Snapdragon solutions, combined with its global launches, positions the company well to tap growth across the board in smartphones. Qualcomm has landed more than 70 3G LTE multi-mode design wins with leading Chinese OEMs based on its Snapdragon 400 chipsets for the high-volume handset tier. Also, the recently announced Snapdragon 410 with integrated LTE would be the world's first 64-bit processor for the high-volume tier and is expected to establish Qualcomm's 64-bit leadership.

Globally, there is a strong growth momentum for Snapdragon-based devices with over 1,350 designs announced for shipping and more than 500 designs in the pipeline, including over 40 tablets. Hence, the design activity is strong and good volume growth is anticipated in flagship tablets, such as the new LG G Pad tablet, the Samsung (OTC:SSNLF) Galaxy Note Pro, and the Samsung Galaxy Tab Pro announced at CES.

Going forward, Qualcomm's newly announced next-generation chipsets are progressing well and continue to demonstrate its leadership. They are on track to ship in commercial devices in the first half of this calendar year and will help its customers take advantage of the increasing interest in Ultra HD across the entertainment and consumer electronics industries.

Qualcomm's new 9x35 modem delivers fourth generation LTE, and the company is on track to extend its LTE leadership. It has already demonstrated the world's first 300 Mbps LTE Category 6 data session on Ericsson infrastructure with the 9x35, and the Category 6 modem is expected to be introduced in the cards, hotspots, and smartphones this year.

A look at the fundamentals

Qualcomm has a trailing P/E ratio of 20.45 and a forward P/E ratio of 14. This shows that analysts are expecting strong growth in earnings going forward. In addition, Qualcomm's earnings CAGR for the next five years is 15%, indicating healthy growth going forward. In addition, Qualcomm has a rock-solid balance sheet.

Qualcomm's debt is just $13 million. In comparison, the company has a whopping cash balance of $17.3 billion. Also, Qualcomm aggressively repurchases shares and has a strong dividend yield of 2.20%. Moreover, considering that the company's payout ratio is just 33%, investors can expect a hike in the dividend as Qualcomm's bottom line continues growing.

Conclusion

Qualcomm has been a solid performer so far and the same is expected to continue going forward. The company's earnings report should be strong, but even if that isn't the case, investors should definitely consider adding the stock to their portfolio due to its bright prospects, and a one-time miss shouldn't deter long-term investors.

Source: Earnings Preview: Qualcomm