Qualcomm: Can It Really Reach $77?

| About: Qualcomm Inc. (QCOM)

As one of the leading mobile base-band chip manufactures in a growing industry, it is extremely hard looking at chip giant Qualcomm (NASDAQ:QCOM) and not be amazed at how undervalued it continues to be. I say undervalued, but the term "overlooked" is also appropriate because very rarely do you hear its name mentioned among the list of the top performers on the market nor does its name come up when discussing one of the best operated businesses today. When looking at Qualcomm's operations, two things come to mind - first, the company is focused on tackling new markets and secondly, it has a very attractive business model - one that has caused some angst for the competition.

With the stock having reached a couple of new 52-week highs of late, I'm beginning to suspect that my attraction to the company is in line with many other investors and I have reason to believe that the success of tech giant Apple (NASDAQ:AAPL) has had a considerable positive effect on Qualcomm's sudden appeal. 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.

Yeah ... but ...

For analysts, many seem unimpressed by what Qualcomm has been able to do recently. There are a lot of "yeah, but" reactions - essentially suggesting that Qualcomm may no longer be able to sustain its growth. Remarkably, this concern comes before the company has shown any ounce of slowing down. This notion goes against the company's current position of being one of the top suppliers of MSM chips for Apple's iPhone and a benefactor of the growing popularity of smart phones, which is projected to grow by 43% this year. That is not even including the increased business that Qualcomm is likely to see from Texas Instruments' decision to forgo the mobile baseband business - an event that will allow Qualcomm to now service the needs of a company such as Nokia (NYSE:NOK).

The quarter that was

Recently, 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. The stock now trades at $62.52 and has since been reiterated as a buy by S&P analyst James Moorman who also set a price target on the stock of $77. But Moorman was not alone in his praise of Qualcomm. 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).


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. 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.

Disclosure: I am long AAPL, TXN, QCOM.