By Mark Bern, CPA CFA
In 2012, Qualcomm (QCOM) will bring a new display technology to market that I believe has the potential to become the new standard in mobile devices, especially in smart phones and tablets. I expect QCOM’s Mirasol displays to displace liquid crystal displays as well as organic light-emitting diodes. The reason: The new displays can show more frames per second which is better for video playback and, maybe even more important, Mirasol displays will use far less energy. That will help batteries last longer and improve multiple selling features, a big plus for phone designers and sellers.
How big is the market? Let’s take a look at what Gartner, a respected, global leader in technology market research, tells us about mobile phones.
In the third quarter of 2010, according to Gartner Group, worldwide cellphone sales grew 35% and smart phone sales increased by 96%. The growth rate for the same period in 2011 dropped to just 5.6% for overall cellphone unit sales and 42% for smart phones. For more details see the link to the full articles here and here.
The 42% growth rate is down from the second quarter 2011 rate of increase of 74% for smart phones. The full article can be found here. There is evidence that many consumers put off smart phone purchases in the third quarter anticipating a newer version of the iPhone from Apple. We’ll have to take a better look at fourth quarter sales figures when they come out to determine if the slowdown was a continuation of the trend or just a temporary setback.
The annual worldwide rate of total cellphone sales, based upon third quarter results, was 1.76 billion units in third quarter of 2011 compared to 1.67 billion units in the same quarter of 2010. But the really important factor to recognize is that smart phones accounted for approximately 115 million units in third quarter 2011 and 87.5 million units in third quarter of 2010, posting an increase of 42%. And that is the key to the revenue and earnings growth for QCOM’s new display product. Tablet sales are lower in terms of units but growing much faster.
According to a news release that can be found linked here, Forrester Research expects tablet sales to grow from 10.3 million units in 2010 to 44 million units by 2015. Gartner expects tablet sales to increase from an estimated 69.8 million units in 2011 to 294.1 million units by 2015. Details from the Gartner release can be found at this link here.
Obviously, the projections are all over the map but the lower boundary is still calling for more than 300% more unit sales in 2015 than 2010. And no matter which set of projections are the closest to reality, we are certain of one thing: It represents a significant growth opportunity for QCOM, especially since this represents new sales for the company.
The question is whether QCOM will increases manufacturing and distribution capacity or follow its current model used for its integrated chipsets (IC) for mobile telecommunications. The current model is to build some of the product but also award royalty contracts to other manufacturers to supply the majority of demand. I like the model with chipsets and am hoping that the company adopts a similar approach to selling the displays. My reasoning is that the company takes on less risk while keeping investment to a minimum. Its margins on the royalty revenue are much higher due to the fact that there is almost no cost associated with production and distribution. QCOM will likely share responsibility for marketing costs with its partners and retain responsibility for all future R&D.
QCOM’s traditional IC business is still growing, albeit at a slowing pace, but adoption in smart phones and tablets is rising due to the chips supporting both GSM and CDMA standards, eliminating the need to produce two separate versions for different carriers. Also, there is good reason to believe that the QCOM IC will be used in the new Apple iPhone 5 since it was used in the iPhone 4 and the iPad 2.
With the kind of revenue and earnings growth I expect, the dividend looks set to continue its rise and perhaps at an even faster pace than previously thought. Over the last five years, QCOM raised its dividend by an average of 27.5% annually. I doubt that rate is sustainable, but I certainly believe a low-double digit average increase is very attainable. The current dividend is $0.86 per year on the recent price (closing price on Monday, December 05, 2011) of $54.49, providing a yield of 1.6%.
All told I expect total return, including the dividend and appreciation, over the next five years to hit 15% per year on average. I’m not excited about the current yield, but I certainly do like the idea of getting a raise of about 12% a year.
Disclosure: I am long QCOM.