Qualcomm Looks Good As EMC Continues To Struggle

Includes: DVMT, QCOM
by: Steve Birenberg, CFA

Last week two of Northlake's stock holdings in the technology sector reported earnings. The verdict was mixed with QUALCOMM (NASDAQ:QCOM) reporting another outstanding quarter and issuing guidance for 2013 above Wall Street expectations. EMC Corporation (EMC) reported earnings in line with recently lowered Wall Street estimates but issued slightly disappointing guidance.

As would be expected, QCOM shares responded well to the company's earnings and guidance, rising more than 5%. Interestingly, after an initial sell-off, EMC shares firmed up. In fact, backing out a 20% drop in the shares of EMC's 80%-owned subsidiary VMWare (NYSE:VMW), the implied valuation of EMC's 100%-owned storage businesses ended the week higher. Of course, a significant part of EMC's valuation is VMW but it could be a positive sign for future performance of EMC stock that the shares held firmly on generally disappointing news. This is often a sign that expectations have been lowered to a beatable level and that sellers of the stock are done. In other words, EMC shares may be in strong hands with better news to come and expectations low.

I do not want to get bogged down in recapping the numbers from QCOM and EMC, so let's focus on the big picture. Northlake's long-term approach to individual stocks emphasizes big picture themes, similar to thematic approach used by Northlake's Market Cap and Style models.

QCOM's results show the company's leading position as the most important semiconductor supplier to smartphone industry. There was worry that Apple's recent market share losses and cautious guidance for the March quarter would negatively impact QCOM. Apple could be as much as 15-20% of QCOM's business. However, the beauty of QCOM is that it is a critical supplier to all of the major smartphone companies, including Samsung, the current market share leader. QCOM is also expanding its addressable market with products for all mobile devices including tablets and possibly laptops and ultrabooks in the near future. The investment thesis for QCOM is simple: riding the wave of smartphone adoption and mobile internet all over the world. High end, low end, emerging markets, industrialized markets. For QCOM, its does not matter. Think Intel back in the halcyon days of the PC adoption cycle. I think the stock can reach $80 this year, up more than 20% from Friday's close.

EMC is a little trickier. Frankly, the stock has been disappointing, trading at about the same level as when it was initially purchased for Northlake clients in the fall of 2011. EMC has a similarly strong secular growth story to QCOM as it provides products to manage the massively growing storage needs driven by the internet revolution. Cloud computing, big data, virtualization… EMC is the leader in many next generation trends. The problem for the stock has been that the bulk of the company's revenues come from large enterprises and governments. These purchasers have been under a lot of pressure to control budgets in a slow growth economic environment amid large Federal and State budget deficits.

EMC management has done a good job and the company has been growing. Growth has lagged Wall Street estimates, however, placing a stiff headwind on the shares. I am encouraged by the action in the shares since the company reported. It is consistent with a bottoming pattern often seen in stocks. EMC's valuation is cheap and it is not a stretch at all to see the stock return to the $30 level in 2013. I am keeping EMC on a short leash, but my current position is to hold on for one more quarter expecting that guidance will have proven conservative and expectations are low setting up a positive surprise and renewed enthusiasm for the shares.

Disclosure: QCOM and EMC are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake Capital Management, LLC, a registered investment advisor. Regulatory filings can be found at sec.gov. QCOM is a net long position in the Entermedia Funds. Entermedia runs long/short equity hedge funds focused on media, entertainment, communications, leisure and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia's investment management company, and has personal monies invested in the Funds.