Is Qualcomm Still Cheap?

| About: Qualcomm Inc. (QCOM)

My sudden love affair with chip giant Qualcomm (NASDAQ:QCOM) has recently been taken up another notch. Looking deeper into the dealings of the company, it is hard not to see an attractive business model and one that seems now more eager to tackle new markets - a reality that has brought some concern to its competitors whom are now scrambling to hold on to their share of the pie, albeit an ever-expanding one. Based on the recent reaction of the stock it seems that the market already knows this story. But nevertheless, in the space dominated by other chip names such as Intel (NASDAQ:INTC) and Texas Instruments (NYSE:TXN), it is hard to suggest that Qualcomm gets the sort of recognition that I think it deserves.

As one of the leading mobile base-band chip manufactures in a growing industry, there is increasing concern from some analyst that Qualcomm may no longer be able to sustain its growth. But this notion goes against its current position of being one of the top suppliers of MSM chips for Apple's (NASDAQ:AAPL) iPhone and a benefactor of the growing popularity of smart phones, which is projected to grow by 43% this year. To offer a more compelling case, one has to consider that the aforementioned Texas Instruments has decided to forgo the mobile baseband business - the likelihood that Qualcomm's volume picks up becomes more of a reality when you consider the need that a company such as Nokia (NYSE:NOK) is likely to have with the void of TI.

Business as Usual

Last week, the company released its Q1 2012 earnings results and proved once again why it belongs in the group of the elite. The company reported earnings per share of 97 cents which is up 18% from the year-ago period - well above analyst expectations of 90 cents. The company said that its revenue for fiscal Q1 climbed 40% to $4.68 billion, ahead of the $4.56 billion that analysts anticipated. Not to be outdone, in terms of its Q2 outlook, the company projects $4.6 billion to $5 billion in revenue. These figures would represent an increase in the range of a 19% to 29% gain from a year ago, as well as an increase of 6% to 13% in earnings per share.

During the stellar report, CEO Paul Jacobs offered the following:

I am pleased to report another record quarter with revenues, earnings and MSM [mobile station modem] shipments reaching all-time highs, driven by our industry-leading chipset portfolio and the continued strong demand for smart phones around the world.

We are raising our revenue and earnings guidance as our broad licensing partnerships and extensive chipset road map, led by our integrated Snapdragon processors, position us well for strong growth in fiscal 2012.

In a recent article, I ranked Qualcomm as having been one of the companies to consider, adding that it has a direct link to Apple and one that can benefit from its success. Based on this recent quarter, it is tuning out to prove true. As of this writing, the stock is up to a new 52-week high at a price of $61 - even though it had already gained 10% year-to-date. Recently, S&P analyst James Moorman reiterated a buy rating on Qualcomm and while setting a 12 month price target of $77, he added the following:

The company raised its FY12 (fiscal 2012) forecast on increased demand for smart phones, and we believe it gained market share in the chipset business," he said in a research note. "We believe QCOM will continue to benefit from a strong product road map and FY12 is shaping up to be a very strong year.

Mr. Moorman was not the only analyst to have been impressed by the figures. Pacific Crest analysts James Faucette as well as Brad Erickson who have an outperform rating on the stock and feel that the improved outlook for Qualcomm is primarily attributable to new products set to launch from original equipment manufacturers like HTC and Research In Motion (RIMM).


Looking ahead, $70 is the next goal in the cross hairs of the company. I would not rule out the possibility of this happening before the summer because as noted, the company has a tremendous business in a fast growing industry. Furthermore, as evident by the recent earnings announcement, it is clear that its management knows exactly what it is doing and should be able to sustain the level of performance. The question for investors is, what is the right entry point for the stock seeing as it is at a new 52-week high? With a trailing P/E of 23, it is hard to say that expectations are not already high, but evidently, they are expectations that are being exceeded.

Disclosure: I am long TXN.