Timing, Safety, and Trends

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

Overview
Qualcomm
(NASDAQ: QCOM) has been growing steadily and profitably. The stock price over the long term reflects this progress, which is fairly easy to attribute to long term growth in mobile phone markets. Will this continue? I think so. Here's why.... 

Secular Trends Generally
The best investments over time are in companies in the path of progress. For example, Cisco, Intel, Microsoft, Intuit, Dell and Apple have benefitted greatly from the emergence of networking and personal computing. The forward evolution of Internet retailing benefits many, including Amazon and Fedex, while poisoning the business of many retailers reliant on foot traffic. Deregulation of capital intensive airlines reliant on costly jet fuel and airplane leases has practically made bankruptcy their normal business model. Netflix found the US Post Office provided better service and convenience than teenagers guarding shelves of videos and expensive popcorn at Blockbuster. Bookstores, DVD stores and airlines are all examples of businesses operating in the path of damage. Major trends, favorable or unfavorable, are extremely important in making investment decisions, and, like tornados, you can nearly always hear them and see them coming. 

Secular Trends In Communications
Since 1985 Qualcomm has been at the forefront of wireless communications solutions. As of October 2012, the International Telecommunications Union (ITU) states there are 6.0 billion mobile subscriptions now covering 86% of the people on the planet. Qualcomm's business is to deploy voice and data technologies worldwide using a combination of licensing (33%) and sale (67%) of their 3G and 4G enabling communications technologies. 

As the ITU data silently points out, the telecom market has changed. Network providers and smart phone makers can't rely on new subscribers for growth anymore. There simply are too few people left without a mobile phone. Competition now focuses on network/device capability and coverage, value added services and maintaining, gaining or losing market share. This will bring consumers better phones, bandwidth, apps, coverage schemes and all sorts of offers to induce consumers to trade in the old car ("the old mobile device") for a new model with new chips, better cameras, talking robots ("Siri"), angry birds, or whatever. :-) These mobile device trends mimick the auto market. Like autos, the mobile phone market has become a cyclical market, highly dependent on the growth trends of the world's economy, consumer confidence and new model adoption.

At present, there are roughly 4.5 billion 2G mobile subscriptions, 1.8 billion 3G mobile subscriptions and 1.1 billion Smart Phone users. 2G/3G will gradually disappear. Then, 4G will reign supreme. HSPA and HSPA+ like broadband will probably find its place in the sun too. These trends benefits Qualcomm, Apple (NASDAQ: AAPL) and others as does new emerging markets on the horizon.

Emerging Trends Drive Growth
Smart cars and self-driving cars are on the horizon. These innovations will be communications dense. Qualcomm is in the path of this progress and has long and relevant experience helping businesses manage mobile assets with communications devices. Communications between many objects ("machine to machine or M2M") is a small, fast growing segment of communications traffic. Jet engines will "talk" to ground-based design groups on every flight, with new data. Cows will "tell" the rancher where they are with communication chips and GPS. Sheep too :-) Traffic lights may see you coming and know to turn green as you approach an otherwise empty intersection. Now that is progress! Don't hold your breath though.... 

The Wireless World is Accelerating

The True Promise of 4G...

4G is in the marketplace, but few, if any providers have rolled out fully compliant 4G standard networks (1000 Mbps transfer rates for low mobility users, 100 Mbps for high mobility users). By comparison, Time Warner's basic wired Internet service was recently increased 50% to 15 Mbps to compete better with ATT and Verizon broadband offerings. Qualcomm and their technology is the basis for 3G, and they are well positioned for a true 4G world.  I have heard some very smart people say wireless will not supplant wired services. Bill Gates once said 640K of RAM is enough, and he is very smart. :-)

With 1000 Mbps transfer rates in the home provided by your smart phone, why would anyone pay for two broadband services each month? Comcast (NASDAQ: CMCSA), and Time Warner (NYSE: TWX) look a lot like Blockbuster, or Kodak, to me. Since mobile broadband is mobile, fixed broadband will disappear from most people's homes and from many offices. Its simply common sense. We'll all be using mobile high speed 4G in 2020. 

Better Mobile Devices Are Coming
Consumers craved faster and better Intel CPU's for decades. The craving has now shifted to smart phones and tablets. The world's largest suppliers and makers of smart phones (Samsung, Nokia, Apple and others) are Qualcomm customers. Given the coming power of 4G and growth in M2M, at least 6.0 billion consumers worldwide will transition to true 4G capable devices (smart phones, tablets, sunglasses, etc) over the next decade, many using Qualcomm technology. 

New Business Ventures are Imminent
Qualcomm has developed a microelectromechanical system (MEMS) Digital Micro Shutter (DMS) which is a low-power alternative to the liquid crystals used to create images in liquid crystal displays (LCDs). This technology (called "Mirasol") is the basis for Qualcomm to enter the display market in early 2013 with a solid competitive offering for a wide variety of device displays. While the ultimate success of this division is unknown, its clearly innovative and consistent with Qualcomm's successful business model of developing patented technologies they can manufacture and license to companies serving the large consumer markets worldwide. Attractively priced Mirasol displays providing lower power use and higher color quality under daylight conditions are likely to succeed in the market.

Financial Strength Equals Great Management
Qualcomm's financial profile reminds me of a smaller version of Apple. Few public companies can match Qualcomm's profits, cash flow, lack of debts and valuable patent portfolio. In the end, this speaks very well of Qualcomm's management and their astute decision making in the markets they serve.

Competition and Competitive Position
Broadcom, Nokia, Texas Instruments, Intel, AMD and others compete for your investment dollar. Over the last 5 years, Qualcomm's stock price has outperformed all these other candidates. Thats not the only factor in deciding who to invest in. Competitive position is extremely important in investment decision making. Qualcomm appears to me to be a top of the hill leader in mobile communications technology. 

Great Customers Can Create Risks Too
95 percent of Qualcomm's revenues are from international sources, and the customers mentioned above represent a substantial amount of Qualcomm sales. Thus, Qualcomm faces substantial risk of stock price decline if one of these customers chose to bolt to another supplier. Any substantial and sustained increase in the value of the dollar compared to the Euro or Asian currencies would also make Qualcomm less competitive, so watching general levels of the dollar versus the Euro and Asian currencies is smart. While these possibilities seem remote, examples abound of businesses getting blindsided by the rapid emergence of new trends and techniques. Just ask Kodak if you need first hand commentary.

Timing and Safety
We can improve decisions by understanding finances, economics, markets, etc., and finding a few voices to listen to that are consistently correct. Qualcomm is attractively priced from a financial perspective relative to several important measures. While thats not the only basis for investment, it is a key factor in determining when to purchase or sell an investment.

For example, SalesForce.com is a great example of an innovative company with a large market value, scarce profits and  unattractive pricing relative to many financial measures. Compared to Qualcomm, it's too risky for me. There is too much uncertain momentum capitalized into the share price. The slightest hiccup in earnings, revenue, guidance, markets or competitive counteroffers from the likes of IBM, SAP, ORCL, MSFT or others and the shares of Salesforce.com (NYSE: CRM) will get slaughtered. For me, when I see sales rising over many years and losses rising too, as with CRM, combined with an extravagant stock price, thats just a hotbed of speculation I'd rather avoid.  

Finite Time Line
Every good investor has a flexible time line for each investment. An entrance point, a flexible holding period and an exit point comprise the finite time line for any investment. Since Qualcomm's markets and business look attractive for many years ahead, the time line appears long. Once real, high speed 1000 Mbps 4G is widely available and adopted, consumers will have fewer reasons to trade in their old phones for a new phone and that will cause chipset sales and licensing growth to recede like the tide. So the exit point with Qualcomm, given today's Qualcomm business, is likely to be a couple years before that wide adoption is complete. Don't forget that Qualcomm managers know this too. They are smart enough to know they must adapt well in advance of the change, else possibly face a Kodak like finish. See the New Business Ventures section above. The new business Qualcomm is entering signals that they know the finish line for attractive smart phone growth is only 10 years away, at best. 

Investment Suitability
Technology companies are always volatile. They hold no regulated control over their markets, like an electric utility or a telecommunications or cable TV company does. However, Qualcomm is large, well capitalized, debt free and quite profitable in a healthy market that's going to be here forever. Even after we turn out the lights, we will still be talking :-) Qualcomm pays a fair dividend (about 1.60%), its a lot better than my bank pays (essentially nothing), and QCom's dividend growth record is excellent. My children and I own a few shares of Qualcomm and Apple. We have no investments of any kind in any other companies mentioned in this article.

Economic Overview Favors Good Growth Stocks
We all know the economy is sluggishly improving. Since bottoming out in 2009, consumer metrics like housing, autos sales, employment and confidence are slowly trending up and should be nearly recovered by 2014. These trends favor Qualcomm.

 


jamesdan567 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Qualcomm and has the following options: long JAN 2013 $50.00 puts on Salesforce.com. Motley Fool newsletter services recommend Apple and Salesforce.com. 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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