Despite another blowout quarter reported by Apple (AAPL) on January 24, it seems Apple naysayers still find reasons to make you doubt about investing in the company's stock. Some of these critics doubt Apple's ability to sufficiently reinvent itself and/or to retain its status as the market leader in smart phones and tablets. Others ignore the underlying growth in earnings and believe that a stock that has esentially quadrupled over the past three years and is now trading at $450 with a $400bn-plus market cap must inherently be overvalued. Others again try to foreshadow Apple's doom, underlining concepts such as the "law of large numbers" or the fact that the company isn't worth much without its iconic founder, Steve Jobs.
I could write an entire article about why I think the above statements are wrong and frankly don't make much sense. However, instead of writing the 12,357th article this month about how great of an investment Apple still is, I would like to approach this discussion from a slightly different angle.
If you, like me, believe that:
1. Mobile technology has huge growth potential both in the developed world and emerging markets, and…
2. Smart phones, tablets, and other wirelessly connected devices are here to stay and will only become more and more popular over the coming decade
…then boy, do I have a company for you: Qualcomm (QCOM).
Click chart to enlarge
(Yahoo! Finance)
Here is an incredibly successful company that is the dominant player in mobile technology and enjoys a first-mover advantage on many of the technologies required by today's (and tomorrow's) mobile devices, be they smart phones, tablets, or anything else using a mobile connection. The company supplies all the major manufacturers such as Apple, Samsung, Nokia, and HTC with its chipsets, which form an integral part of just about any advanced mobile device in the world today. Even Microsoft (MSFT) has confirmed that it will use Qualcomm chipsets for its new Windows 8 operating system. Hence, it doesn't matter who wins the war for the smartphone and tablet market - be it Apple, Samsung, Microsoft, or somebody else - in the end they all use Qualcomm's technology in some form or another.
What's even better, though, is that Qualcomm will be the main beneficiary of the coming mobile technology upgrade cycle. Much of Qualcomm's business (about 35%, in fact) comes from licensing its technology/patents and collecting licensing fees and royalties. These fees tend to be larger for newer technology, and the newer the licensed patents, the longer and larger the revenue stream from those patents. To cut a long story short, Qualcomm makes a lot more money from licensing its 3G and 4G technology than for older technology that is still mainly used in large parts of the developing world. Many of the largest mobile phone markets (China, India, Africa, Latin America) are still mostly operating on older mobile technology and are only now starting to upgrade to higher-speed 3G/4G technology. The billions of users in those markets now upgrading from their old standard mobile phone to a new 3G/4G smart phone will drive a tremendous amount of top- and bottom-line growth for Qualcomm.
Add this upcoming upgrade cycle to the overall proliferation of mobile technology in our everyday lives, and you start to understand the huge opportunities that currently exist for Qualcomm. It's not just phones and tablets anymore. Medical devices are increasingly connected, utilities use mobile technology in smart metering, and even our homes are becoming ever more connected. Mobile technology is all around us, and this growth will accelerate even more over the coming years. While many firms will benefit from this massive development, it is undeniable that Qualcomm has taken the lead and is looking at a very prosperous future.
Now before we buy a stock purely on a good growth story, we should of course always check the fundamentals.
Qualcomm is currently trading just above $60/share, with a market cap of $102bn. Revenues for fiscal year 2011 were $14.96bn, with GAAP net income of $4.26bn or $2.52 per share. However, the company recently announced record first quarter results for fiscal year 2012, including:
- Revenues of $4.68bn, up 40% year-over-year
- Operating Income of $1.55bn, up 24% y-o-y
- Net Income of $1.40bn, up 20% y-o-y
- Diluted EPS of $0.81, up 14% y-o-y
Not only did the company post record revenues and profits, but it also returned $362 million ($0.215/share) to shareholders in the form of a cash dividend and spent $99 million to repurchase 2 million shares of common stock, both very positive signs for any shareholder. The company does not have any long-term debt, sits on almost $12bn in cash (about $7/share), and enjoys a 30% profit margin (which is even a bit higher than Apple's 26%, by the way!).
Qualcomm is now guiding $3.36-$3.56 in EPS on revenues of $18.7-$19.7bn for fiscal 2012, which I believe may still be conservative given the company's current growth potential.
If Qualcomm's guidance turns out to be correct and EPS come in at $3.50, applying the current P/E ratio of 24x would yield a share price of $84, an attractive 35%-40% increase over today's price. Even if the P/E ratio were to drop to its more recent average of 22x, this would still yield a price of $77 or an upside of 25%-30% over today's price, excluding any dividend (currently around 1.5%). Furthermore, I believe that EPS of well above $4.25 or even $4.50 is entirely within reach for fiscal 2013, which would propel the stock closer to $100 for a gain of over 60% in two years.
As with every investment, there are risks. In Qualcomm's case, these include patent litigation, government regulation, and the emergence of competitive technologies. However, I feel that these risks are manageable and far outweighed by the compelling investment case this stock presents.
If you're looking for a dominant, fast-growing, debt-free company that is bound to reap huge benefits from the worldwide trends in mobile technology, regardless of who wins the smartphone/tablet wars, look no further. Qualcomm is a strong buy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in QCOM over the next 72 hours.
