The Best U.S. Chip Companies Know China
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What are the best U.S. stocks for an investor interested in semiconductors?
Could it be Intel? Nope? Texas Instruments? No again. Both have gone nowhere over the last five years.
Qualcomm comes out of the mobile phone business. Almost three decades ago, at the dawn of the digital mobile phone era, they offered an encoding scheme called CDMA promising to squeeze 10 calls in the spectrum of one analog call, using a frequency-hopping technology originally created by actress Hedy Lamarr (and composer George Antheil) during World War II.
Qualcomm specializes today in chip design, and in making its patented technolgy an integral part of each new generation of phones and mobile base stations. Its primary mobile chip line is the Snapdragon, and it could be on the way to a big win there, as Samsung may be about to adapt them for use in its Galaxy smartphones, according to Expert Reviews UK.
Qualcomm has been focusing lately on its QuickCharge technology, and its newest version can recharge your mobile in one-fourth the time rivals require. As the Fool's Daniel James noted recently, they recently reported another blow-out quarter.
The market cap of Qualcomm is now larger than that of Intel, by almost $10 billion, and there seems little reason to believe it won't continue moving ahead. The company brings more than one dollar in every four down to the bottom line, its debts are fully paid, so the $13.75 billion cash on its balance sheet should continue to grow. It also has great power to acquire smaller companies.
One such company might be Broadcom, which is less than one-fifth its size in market cap. Broadcom is also into mobile communications, but in a different way.
Broadcom is about communications defined by hardware, rather than by networks.
Broadcom was hit by a bad scandal during the last decade, involving co-founder Harry Nicholas, but it has since recovered. The shares now trade 23% higher than they did when the indictment was unsealed, in June of 2008, and the stock price has doubled since the bottom of the Great Recession.
Broadcom's secret sauce is less its designs than its business model. Like Qualcomm, it operates without its own fabrication plants – it designs chips and has them manufactured on-order – so it needs to create demand.
It does this by working directly with U.S. equipment makers on one side and Chinese manufacturers on the other, producing designs with the former that are then ordered through the latter. This suits the Chinese fine -- their margins are way too thin to afford anything but finished designs with guaranteed markets.
Broadcom Ethernet controllers and wireless communication devices are sold under a host of brand names, both American and foreign. The company defines its markets as “home, hand and infrastructure,” which runs the gamut from carriers to phone makers to cable and networking companies.
Broadcom is not as big as Qualcomm, nor as profitable, but revenues are up from $4.5 billion in 2009 to $8 billion last year. This has come at the expense of some debt, now about 15% of assets, but that's very manageable, and interest rates are dirt cheap. Operating cash flow is on the up, whether you look at it from a quarterly or annual perspective. Return on equity is a healthy 13%.
Broadcom is based in Irvine, Calif., up the coast from Qualcomm's San Diego headquarters, and Qualcomm could in theory buy Broadcom, but the two companies have quite different business cultures. Qualcomm is focused on carriers, Broadcom on manufacturers. Qualcomm is buttoned-down, Broadcom swashbuckling. Both have salesmen who will buy you a nice steak dinner, but the Broadcom guy is more likely to take you out for some adventure later.
Which to Buy?
Safe investors can't go wrong with Qualcomm. It's the best play on the U.S. chip board. But Broadcom has made a nice recovery from its past problems, without really changing its focus, and it may deliver a better shot at capital gains in a near time horizon.
DanaFBlankenhorn has no position in any stocks mentioned. The Motley Fool owns shares of 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!