By Brian Tracz
Julian Robertson's Tiger Management upped its holdings of this stock by 58 percent from the first quarter to the second quarter. Lee Ainslie's Maverick Capital also increased its position in this stock by a whopping 147 percent, making it the fund's single largest holding. And no, I'm not talking about Apple Inc. (AAPL), though both funds have significant positions in Apple.
The company I'm referring to is Qualcomm, Inc. (QCOM), a major manufacturer of circuit products for wireless technologies around the world. The company shipped 141 million integrated circuits for CDMA- (3G) and OFDMA- (4G) based wireless devices, up 18 percent year-over-year. Why are hedge funds enthusiastic about its growth prospects?
Growth of the industry. As indicated in its second quarter earnings report, wireless subscriptions increased 3 percent in the second quarter worldwide, indicating strong long-term a global demand. The developing world is still upgrading to 3G, and with the steady refinement of circuitry, we are still awaiting a strong upgrade globally to 4G, particularly in China. The company's 28 nanometer integrated circuit production is not able to meet demand due to supplier holdups. However, management expects increased supply of 28 nanometer integrated circuits in 2013, leading to a strong fiscal performance along with the 3G/4G market segments. Qualcomm's efficiency and strength in 4G LTE engineering outshines its competitors, allowing it to take "economies of scale" advantage of demand momentum for the technology.
Valuation. Qualcomm shares were in a bit of a slump from May to July, trading in the mid-$50s. So it's possible that funds increased their stake at these prices. However, we think the present price in the low-$60s is attractive given Qualcomm's business. Shares are trading at 21 times 2012 estimated earnings, which is priced within the upper and lower quintiles of the IT sector. The company maintains excellent net margins of about 31 percent and makes efficient use of its cap ex. Strong revenue growth of 28 percent year-over-year in the second quarter adds to our positive outlook on the company's operations.
iPhone 5 involvement. Qualcomm makes components contained in Apple's iPhone, as we reported earlier. The iPhone 5 release is widely anticipated as the largest consumer electronics release in history, with analysts predicting sales of 250 million units total and about 50 million sold in the quarter of its release (the release might occur during a "special event" on September 12). One of Qualcomm's prime business segments is royalty collection for the use of its patented circuits. Qualcomm collected royalties on about 40 percent of handsets sold in 2011, and that number is expected to increase to greater than 60 percent within the coming years.
Windows RT involvement. Windows RT is the tablet analog of Microsoft Corporation's (MSFT) Windows 8. Dell Inc. (DELL) is using Qualcomm's circuit platforms in its laptop/tablet crossover device that is expected to be released after Windows 8. Samsung Electronics Co., Ltd. (KRX:005930) is also using the chips in its new tablet releases.
Tablet and computer vision research. The tablet segment is essentially a new marketplace for Qualcomm's 3G/4G products. The company is opening a tablet-focuses plant in Sao Paolo, Brazil, for an initial investment of less than $1 million. The company's Augmented Reality computer vision platform is also an interesting concept. Google Inc (GOOG) came out with Google Goggles in 2010, an application that was meant to recognize various objects in the user's environment and search for them by comparing them to Google image search results. Augmented Reality provides the high-firepower software foundation for this sort of technology, comparing objects from streaming video to a database frame-by-frame, as detailed by Jay Wright, senior director of business management at Qualcomm. These tangible innovative projects, though they are not going to be immediate revenue drivers, are signs of a healthy tech company that is growth-centered.
Other tech big-shot investors like Philippe Laffont have Qualcomm in their top 10 holdings (you can view Laffont's Coatue Management portfolio here). This is an attractive investment with which to ride the secular upward trends in wireless technology demand.