Qualcomm (QCOM) is the world's leading fabless developer of communications related semiconductor products. If it goes in a wireless device, Qualcomm makes it. Its "Snapdragon" system-on-chip lineup powers almost every high end non-Apple (AAPL) smartphone, from Samsung's (OTC:SSNLF) Galaxy S III to Nokia's (NOK) Lumia 920. The firm also owned 51% of the wireless baseband market in 1H 2012 (with Mediatek second and Intel (INTC) third, each with low double-digit share).
In my earnings preview, I noted that the company was setting up for another blowout quarter. The thesis was simple, but it proved to be effective:
- Qualcomm still saw double-digit Y/Y growth during each quarter of 2012 despite supply shortages. As supply improves, Qualcomm should (and did) see even more upside.
- The firm's "Snapdragon" chips exclusively power the Windows Phone 8 devices from Microsoft (MSFT) and are found in almost all of the high-end Android devices (thanks to integrated 4G LTE support)
- The firm's baseband/modem products are found not only in the Android and Windows Phone devices, but in the Apple iPhone 5.
The Numbers Don't Lie - This Was A Blowout
It's hard to argue with cold, hard data. Qualcomm's FQ4 was absolutely stellar in every sense of the word.
On the revenue side, the company came in at $4.87B, an 18% year-over-year increase, and on the bottom line, came in at $0.89/share in net income excluding charges (against a consensus of $0.82 and a range of $0.79 - $0.87). This was due to a Y/Y increase in ASPs as well as a surge in royalty bearing devices sold in the previous quarter.
On the guidance, the company is expecting $6.1B in revenue and EPS of $1.08-$1.16, well above consensus of $5.29B and $1.00, respectively. For the full fiscal year, the company is looking for $23B-$24B in revenue and $4.12-$4.32 EPS, which were also both well above consensus of $21.7B and $4.13B, respectively.
Sustainability - 2013 Should Be A Breeze
The surge in revenues and net income came due to a sharp increase in ASPs on royalty bearing devices as well as a surge in units shipped (MSM shipments were up 22% from the prior year).
Right now, there's no stopping Qualcomm's march on the high end of the smartphone space with its baseband chips. While other companies have begun initial rollouts of its 4G: LTE capable modems, Qualcomm's momentum is strong enough to push it through the entirety of FY 2013 nearly unopposed. With a lead in applications processors (both CPU and graphics superiority), baseband, and in the integration of these components into a single chip (Qualcomm is the only one with shipping products that achieve such integration), momentum going into FY2013 should be particularly strong.
Now, these new designs from Mediatek, Intel, and Nvidia should sprout in the 2013/2014 timeframe, and at that point, Qualcomm will face some credible competition. Until then, though, the next round of non-Apple and non-Samsung devices will likely be devoured by Qualcomm. This means ASPs remain high for its baseband products and Snapdragon SoCs.
Don't Worry About That R&D Increase - Embrace It!
Another thing that investors need not worry about is the 31% year-over-year increase in R&D that the company reported. In order to maintain a dominant position in its field - especially against Intel and Nvidia who are simply salivating over Qualcomm's massive market share - there needs to be aggressive R&D done to keep the company similarly ahead.
In short, when it comes to a high tech company in the lead, increased R&D is good, not bad!
That Cash Pile
What makes Qualcomm's valuation particularly attractive is the $26.5B in cash that it's sitting on (with about $1.18B of long-term debt). This means that the company has enough to really step up R&D, break into new product areas, tilt the supply chain in its favor (especially after that 28nm shortage that hamstrung sales earlier in the year), and essentially keep its dominant position.
In fact, with its cash pile, it could easily go ahead and purchase most of its competitors outright. However, I suspect that instead of this, the company will be hiking up buybacks and dividends.
Qualcomm hit it out of the park. If you want the leading semiconductor in the wireless/mobile space, then you buy Qualcomm. With a pristine balance sheet and the best-in-class technology in very high barrier to entry areas, this is one stock that you should seriously consider buying whenever it goes on sale.
Additional disclosure: I may initiate a long position in QCOM over the next 72 hours.