By Steven Edwards
Qualcomm (QCOM) is the largest fabless semiconductor company and is frequently mentioned as one of the companies in Apple's (AAPL) orbit. But Qualcomm is more than an Apple supplier. Its chipsets are in about 250 million smartphones and counting, including the new iPhone. The "comm" in Qualcomm stands for communication, and chips used for communication are the company's core competency.
The semiconductor chip industry is worried about a falloff in demand with the withering of the PC, but chipmaker Qualcomm has a different problem: getting enough chips to keep up with orders. Although the company cut estimates for this quarter's earnings, partly due to a shortage of new 28 nanometer chips, it expects to have a great December quarter with the launch of "a number of flagship devices" according to Chief Financial Officer William Keitel.
Qualcomm has a lead in so-called Long Term Evolution (LTE) baseband processors, but faces new competition from Intel (INTC), which is otherwise hurting because of lackluster PC sales, the major market for its microprocessors. Google (GOOG) made some waves by adopting the Intel Inside branding in its new Motorola Mobility Razr i. Nvidia (NVDA) is also supplying some new competition in the applications processor market, particularly in the tablet market. Samsung (KRX:005930), Texas Instruments (TXN), and Broadcom (BRCM) also make mobile processors. Aalok Shah, an analyst for D.A. Davidson recently cut his price targets on Qualcomm because of competitive pressures.
It should be remembered, however, that Qualcomm's sales growth rate, about 15% annually over the last five years, is fueled by the increase in data transmission through mobile devices, which is currently logarithmic and is likely to continue that way for the foreseeable future. Qualcomm is preparing for a 1000 fold increase by the year 2020. The company thinks that a lot of that data will be handled by "small cells"- small local transmitters, about the size of a playing card, that supplement mobile networks. Many people already use these to improve mobile reception in their homes or business, but soon they will be ubiquitous, and a lot of network traffic will be handed off to these local nodes, which Qualcomm is already selling.
In Qualcomm's view of the future, the next wave of in mobile will be widespread machine-to-machine communication. Household appliances, cars and other machines will all be part of the network. Your car will be able to call your air conditioner and tell it to start running, so that the house will be comfortably cool by the time you get home from the airport. It's not enough that everyone's sub-teen-age daughter should have a cell phone, but point-of-sale terminals, utility meters, gas pumps, ATM machines et cetera all must be equipped with communications ability. Therein lays an opportunity for a vast increase in the intelligence and efficiency of supply chains and payment processing and of course, a huge market for the company's chips.
Another example of Qualcomm's forward outlook is its Halo wireless charging system for electric cars, currently being tested in London by Delta Motorsport (privately owned), a London based consulting firm. Right now, of course, electric cars are a tiny market. But electric vehicles also include lots of fork lifts, motor-scooters, golf carts, four wheelers, trains and buses. The inductive energy transfer system used for cars is a larger scale version of systems that Qualcomm has developed for charging small electronic devices wirelessly.
Qualcomm was the ninth largest holding among hedge funds at the end of last year, with billionaire Ken Fisher as the largest single investor. Leon Cooperman's Omega Advisors doubled its stake in Qualcomm in the second quarter. David Tepper's Appaloosa Management is also a major holder.
However, Qualcomm's stock price has been under pressure recently. Part of Qualcomm's problem is its close association with Apple, which after breaking 700, has had problems. Bad reviews of some important iPhone aps, like the mapping function, are partly to blame, upsetting the "Apple can do no wrong" narrative. Part of the problem is also some general weakness in tech stocks.
But longer term, consider the following: Qualcomm has a pristine balance sheet, virtually debt free, with a debt/equity ratio of 0.03. Its operating profit margins are in the neighborhood of 30%. Qualcomm held 48% of the market for smartphone chips in the second quarter of this year, while that market was expanding by 61%. Qualcomm only has to hold its own in this market to do very well into the future. But Qualcomm has been the technological leader in this space, and will likely continue to be. Last year, the company's chipsets were featured in 745 new device models. As 3G fades into 4G, and as tablets multiply, it is hard to see how this company does anything but flourish.
In my opinion, Qualcomm is a long term buy, one of those core holdings you should put away and maybe keep to fund your grandchildren's education. You get a small (1.7%) but growing dividend while you hold it. The company's recent weakness may be a good time to establish a position.