Is Qualcomm Positioned to Give You Superior ‘Growth at a Reasonable Price’?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Qualcomm (NASDAQ: QCOM) came in tenth on our list of top ten tech stocks loved by hedge funds (see our entire epic Top Ten here). Despite having a market value in excess of $100 billion, Qualcomm still has solid growth prospects. The semiconductor company is being driven by a solid increase in demand for high-end smartphones and tablets. Qualcomm reported solid results last quarter and management provided a strong outlook for 2013 based on the rapid transition from 2G to 3G in China and India. The Wireless Intelligence Report expects over 1.5 billion subscribers to be added to 3G networks in the next two years.
Another driving factor will be the adoption of LTE networks in developed nations, including the rapid adoption of LTE in the U.S. Qualcomm is also battling with Intel to become a key supplier for Apple’s future iPhone iterations. Intel has primarily been the driving force behind the tech that supports Apple’s smartphone, but Qualcomm’s new platform has been taking market share from one of its biggest rivals. Billionaire Ken Fisher of Fisher Asset Management is one of Qualcomm’s top fund owners (check out Ken Fisher's new picks).
Qualcomm’s latest quarterly results showed the tech company shipped over 140 million MSM chipsets, which is up 11% year over year. Qualcomm’s newest platform, Snapdragon, is already seeing industry-leading growth. Qualcomm estimates some 420 different devices are using Snapdragon already, and another 400 models are in the pipeline. Our thesis on Qualcomm remains that it is one of the best ‘growth at a reasonable price’ opportunities in the industry.
Texas Instruments (NASDAQ: TXN) is nearly a third of the size of Qualcomm as measured by market-cap, but has the lowest growth rate among our semiconductor stocks listed, with a five-year expected earnings growth of only 2% annually. Where Texas Instruments falls short in growth it makes up in dividend. The tech company pays a 2.7% yield with only a 25% payout. We still remain cautious since Texas' valuation is on the high end – forward P/E of 17x – and it has the highest debt-to-equity ratio by far at 50%. Many top-name billionaires fell out of love with Texas Instruments during the third quarter including Jim Simons, Ken Fisher and Ray Dalio (see Ray Dalio's top bets here).
Maxim Integrated Products (NASDAQ: MXIM) pays the highest dividend of Qualcomm’s peers and one of the highest among semiconductor companies. With a dividend yield of 3.3%, Maxim already looks attractive, but that is where the attractiveness ends. Maxim’s dividend is a 55% payout of earnings and the tech stock already trades richer than most of its peers at 14x forward earnings.
Nvidia (NASDAQ: NVDA) is down over 10% year to date as it has more exposure to the PC market, compared to Qualcomm’s exposure to the high-growth mobile market. This semiconductor company is the cheapest among Qualcomm's peers at an 11x P/CF, and a 13x forward P/E, but we believe this is well deserved. Nvidia's expected EPS growth rate is only 4% over the next half decade (in annual terms), while the company also has one of the lowest return-on-sales ratios at only 12%.
Broadcom (NASDAQ: BRCM) is another major semiconductor company that is up 10% year to date. Broadcom has the best expected growth of any of the other stocks listed; it's expected to grow earnings 20% a year over the next half-decade. This alone makes the stock attractive, but coupled with its industry-low 11x forward earnings multiple and Broadcom becomes a solid 'growth at a reasonable price' play.
Qualcomm, even as a large-cap stock, still offers investors solid growth prospects. With a balance sheet that boasts no debt and $12.3 billion in cash, Qualcomm is a solid buy. The semiconductor company only trades at 13x forward earnings, compared to the current forward P/E of Texas Instruments (17x), which has a less impressive balance sheet and growth prospects.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services recommend NVIDIA. 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!