A Smart Bet on Mobile Growth

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Peter Lynch once explained that during a gold rush it may be a better idea to invest in picks and shovels producers than in gold miners. That´s especially true if you can find a high quality equipment producer with an outstanding clientele made of almost every relevant gold miner in the industry.

The mobile revolution is on its way, and it will provide many opportunities for growth over the next years. While giants like Apple (NASDAQ: AAPL), Samsung and others fight for the gold, Qualcomm (NASDAQ: QCOM) is uniquely positioned in the “picks and shovels” business, and this makes the stock a great buy for those willing to make a smart bet on the mobile boom.

Covering all the Bases

Some Wall Street analysts have been concerned about Qualcomm after learning that Apple delivered lower than expected sales for the last quarter. Although Qualcomm is certainly linked to Apple, the company showed those analysts that they have no reasons to doubt its growth prospects by delivering a blowout earnings report on Thursday.

To begin with, Apple is being a victim of its ultra-successful past: analysts are comparing the company´s current growth versus the high growth stage of the iPhone, and they are exaggerating their negativity by focusing on the past as opposed to the future. That´s the only explanation I can find to understand why 29% growth in iPhone sales and a 48% increase in iPad revenue can be considered “a disappointment”.

It is true however that Apple will have a tougher time replicating in emerging markets the success it has achieved in the US. Android smartphones have a market share of more than 75% on a global scale thanks to a combination of high quality products from Samsung at a competitive price and the growing popularity of low cost alternatives like HTC.

The good news for Qualcomm investors is that the company still wins if Samsung – a major client – wins. In fact, management is quite upbeat about Qualcomm´s prospects in emerging markets: “Emerging markets in general are going to be strong. We’re definitely driving the low-end markets hard so we can get a lot of new people onto smartphones. Things are going well across the board.” The company´s CEO recently told to Bloomberg recently.

Qualcomm supplies the high end player with a dominant position in the US, which is Apple, and it also sells to competitors like Samsung and HTC that have been expanding rapidly in emerging markets. Both in the high and low end of the pricing spectrum, the company is positioned for growth.

Microsoft (NASDAQ: MSFT) has been putting a lot of effort in mobile lately, and it has received some positive reviews for Windows 8 smartphones. It´s Surface tablets, on the other hand, don´t seem to be selling very well. Microsoft won´t have it easy in mobile, this is a platform war in which ecosystems depth is a crucial competitive variable, and the company is behind competitors in that aspect.

But this is still a major company with a huge user base and a solid position in the productivity segment, so the Microsoft has the resources to achieve a third place in the mobile platform wars. If Microsoft can get in that third position, it could gain acceptance from customers and start thinking about growth over the following years.

 If that ever happens and Microsoft finally starts gaining market share in smartphones, Qualcomm can let Apple and Samsung worry about the possible consequences, since the company is well integrated into Microsoft´s mobile products too.

Competition

As long as the mobile revolution keeps growing, Qualcomm investors are extremely well positioned to profit from it, no matter which device manufacturer wins. The company is one step above the competition when it comes to the technological quality of its products, but competition is still the biggest risk to watch here since the industry is quite dynamic.

The biggest competitive threat to Qualcomm at this stage is probably NVIDIA (NASDAQ: NVDA) which scored a notable win by displacing Qualcomm in the well-received Nexus 7 tablet with its much successful Tegra chips. Just like Qualcomm specializes in baseband radio, NVDA is stronger in graphics and gaming, and the company has just unveiled its Tegra 4 products which are reportedly quite powerful.

 NVIDIA is also rumored to be interested in manufacturing tablets and smartphones for other companies as a withe level manufacturer. This rumor is still unconfirmed, but in that case NVIDIA could become the partner of choice for Chinese companies which are trying to gain market share in the low en segment of the pricing spectrum.

Intel (NASDAQ: INTC) is feeling the pressure as mobile devices replace PCs and the company is trapped in a declining industry, but it won´t go down without a fight. Mobile is not an opportunity but a necessity for Intel at this point, and the company is putting its abundant financial resources behind that target.

The company has a new management team which has made the shift towards mobile its primary objective, and it plans to apply to smartphones and tablets the significant systems-level design capability that delivered so much success for the company in PC and servers. It´s too early to tell if Intel will be successful in mobile, and even if it does, it doesn´t have to be necessarily at the Qualcomm´s expense. But Intel is another competitor that Qualcomm needs to watch closely.

Bottom Line

Qualcomm is in an extremely convenient position to benefit from the mobile boom by supplying the biggest players in the industry. As long as the company can stay ahead of the competition it will continue rewarding shareholders with extraordinary growth prospects.


acardenal owns shares of Apple and Qualcomm. The Motley Fool recommends Apple, Intel, and NVIDIA. The Motley Fool owns shares of Apple, Intel, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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