Can This Industry Bellwether Ward Off Rivals?

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

Matt Grob, Qualcomm’s (NASDAQ: QCOM) chief technology officer, recently said that the company expects mobile data traffic to grow 1,000 times over the next ten years. To capitalize on this huge growth in data traffic, the semiconductor giant is now looking to accelerate the development of its MEMS-based technology through a $120 million investment in Sharp, the troubled Japanese electronics firm.

Last week Sharp confirmed the completion of the first half of the deal, which will see the two companies jointly work on MEMS display technologies. Qualcomm will invest a further $60 million in the first half of 2013 in a transaction that is likely to make it the single largest shareholder in Sharp. This is undoubtedly a significant development for Qualcomm and good news for Qualcomm shareholders.

Qualcomm: The Undisputed Leader In Mobile Processors

Qualcomm’s chipsets are used in the two most dominant mobile operating systems, Google’s (NASDAQ: GOOG) Android and Apple’s (NASDAQ: AAPL) iOS, which account for a combined 85% of the market. Microsoft has also selected Qualcomm as the sole supplier of chipsets for its WP8 handsets.

For the high-end smartphones supporting LTE (Long Term Evolution), Qualcomm’s Snapdragon dual-core processors served well to maintain its leadership position. For example, Samsung’s Galaxy S III and HTC’s One X series had to be launched in the U.S. with a Snapdragon core, since rival chipsets did not play well with Qualcomm’s LTE basebands.

Competition Catching Up

However, competition is slowly catching up, with Intel (NASDAQ: INTC) recently releasing its first low-power Atom products for mobile devices. Chips based on Atom design can directly compete with the dual-core Qualcomm Snapdragon S4 (in programs that use multiple cores, too). Intel's ground-up redesign Silvermont is expected to hit the market in late 2013 or early 2014. This will lead mobile device vendors to adopt Intel's products.

The World’s number two smartphone manufacturer, Samsung, manufactures chipsets for iOS and Android devices. The company is expected to incorporate its own chips in its mobile devices going forward. Samsung is making its Exynos chipsets LTE-compatible as well. Nvidia also announced recently that it plans to integrate an LTE chipset into Tegra in 2013.

Sharp Will Help Qualcomm Maintaining Leadership

Qualcomm’s subsidiary Pixtronix is making the investment in Sharp. The deal will help Qualcomm combining its MEMs display technology with Sharp’s IGZO technology to develop a range of new products for devices of varying sizes and types. With $3.8 billion cash on the balance sheet it makes a lot of sense for Qualcomm to grow its business by partnering with other companies in other mobile-related areas such as displays.

The semiconductor giant has chosen Sharp in order to boost adoption of its Snapdragon processors. According to the deal, the two companies will consider the possibility of using Qualcomm processors alongside the low-power MEMs/IGZO technology.

The Bottom Line

With increasing sales of smartphones, Qualcomm’s licensing revenue is rising steadily. Mobile computing is exploding and mobile data traffic has doubled annually in recent years. Qualcomm expects that cellular networks will be able to handle the explosion of mobile data implied by a fast-growing population of users around the world, each downloading more and more data. This tremendous growth outlook justifies Qualcomm’s current PE multiple of 17.6, which is nearly double that of Intel.

Now with closing the Sharp deal, Qualcomm is expected to hold its leadership position for the long run in the semiconductor sector. No other company comes close to its market breadth in powering smartphones, tablets and infrastructure. In the past 12 months its revenue grew 18% and its earnings per share grew 19%. With rising R&D expenses and capital spending and overhead forming a small part of the income statement, the stock is a good bargain at the current price for long term investors. And a dividend yield of 1.6% comes as bonus!

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, Intel, 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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