Qualcomm and the iPhone 5
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the world waits for the release of the next generation iPhone from Apple (NASDAQ: AAPL), one of the biggest winners of the new device may be Qualcomm (NASDAQ: QCOM). While the specific suppliers for the still-unannounced device remain a “best-guess,” it is reasonable to believe that Apple will stick with many of the partnerships with which it has been successful in the past. One of the most critical features expected to be added to the iPhone 5 is 4G LTE capability. This points to Qualcomm as the most likely choice for the wireless chips that will allow the phone to function on the new protocol. While there are other suppliers that will benefit – Broadcom (NASDAQ: BRCM), for example, will likely supply the Wi-Fi chips – the Qualcomm component is both critical and will help bring attention to other devices in which the chip will be included.
The Importance of the Launch
While it is expected that Qualcomm will, in fact, be the chip used in the iPhone 5, the importance of the news is a matter of some debate. From an investment perspective, there is an argument to be made that the information is already priced into the stock. If the iPhone 5 is set to launch later this month with the Qualcomm chip, the order must already have occurred. Given this reality, it is not unreasonable to believe that the order is abstractly included in the price by way of the company’s guidance. This contingent suggests that chip investors act early so as to capture the move.
Those more bullish on Qualcomm believe that the news is only partially included in Qualcomm’s share price. While anticipation of the rollout and the inclusion of a Qualcomm chip will be priced in, if the iPhone 5 captures expected sales, this has the potential to benefit Qualcomm’s bottom line for several quarters. The inclusion of chips like this is a key driver of the consensus EPS growth projections of 14.3% over the next five years. Similarly, Broadcom has done well and has a consensus EPS growth projection of 15%. Broadcom has placed itself in a strong position within its niche while still maintaining very attractive fundamentals and growth prospects. The Qualcomm 4G LTE chip may get more attention this week, but Broadcom is worth taking a hard look at as well.
Beyond the iPhone 5
In addition to iPhone 5 news, Qualcomm will likely benefit from other positive catalysts this week. The announcement of the chip’s inclusion in a new Motorola Razr, as well as in the new Windows Phone should help to bring positive attention to the stock all week. While the inclusion in the Windows Phone was expected, the new release from Google’s (NASDAQ: GOOG) Motorola Mobility division is somewhat unexpected. Earlier this year, Motorola Mobility announced a strategic alliance with Intel (NASDAQ: INTC). While exclusivity was never discussed, some investors read the announcement in that light. The likely scenario is that Qualcomm will get the U.S. business, while European-based releases will include Intel.
While some of the coming releases may be included in the stock’s price, Qualcomm appears to be very well positioned in its space. For the time being, the company seems to be taking over the 4G LTE chip space. Each successive product launch should be seen as a positive and potential catalyst for the stock. Intel will likely catch up by 2013, but for the remainder of the year, Qualcomm is in control. As such, Qualcomm is a buy at current levels.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Intel, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, and Intel. 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.If you have questions about this post or the Fool’s blog network, click here for information.