My recent article disclosing that I had sold out of my position in chip giant Qualcomm (QCOM) appeared to have ruffled a few feathers. The article prompted a few emails with a few suggesting that I had sold too soon and others just wanted to know if the company still had room to grow. Now as far as whether or not I sold too soon, that remains to be seen. I made it clear that it was merely a trade that I felt I needed to make at that time. But as far as the company's growth prospects, I don't think there should be any room for concern.
No Growing Concerns
For Qualcomm, the company has a tremendous business in a fast growing industry. Furthermore, as evident by the results in its latest quarter, 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 keeps reaching new 52-week highs? However, seeing as analysts continue to feel there is at least 26% more room to the upside - this should bring some comfort to investors willing to hold for the long term - 12 to 24 months.
One such analyst is S&P's James Moorman who recently 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 shown 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 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).
A Better Business
For a great of a business that Qualcomm has, it still has several challenges and not the least of which includes stiff competition from the likes of Texas Instruments (TXN), Intel (INTC) as well as Nvidia (NVDA). Each of these names understands exactly what is at stake - the race for the mobile space. In fact, this is where a significant portion of the pressure that the company feels not only from the standpoint of growth but also within its margins. Investors can see this as its gross margins fell off a bit from the previous quarter and more than six points year over year.
However you chose to look at it, the company has a tremendous business and continues to be a leader in its industry. It also helps to see that management believes in its strategy and has continued to re-invest capital back into the business. So as much as I now think the stock is somewhat out of my price range, the company continues to prove why it should be mentioned among some of the best run businesses on the market. In its last report, it is clear that its business is being run effectively and the company is making plenty of money and securing market share.
Qualcomm 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.
It is hard to assume that the company will not trade higher at current levels being in such a dominant growth industry. When you couple that with excellent management and a tremendous business model, it is a recipe for success. For investors however, timing an entry is the challenge. Again, as the stock sits at its 52 week high, conventional wisdom would suggest that you wait for a pullback, but doing so with a company so dominant, you may find yourself waiting for an opportunity that never arrives. With analysts suggesting that $77 is a possibility, this might be one of those times where you just buy the stock and forget about it until it gets there or until your time horizon is reached.