Should You Bet Your Chips on Qualcomm?

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

It seems that the mobile and tablet race is bringing forth one dominant winner. When it comes to processors that power smart devices that we all love to use, Qualcomm (NASDAQ: QCOM) is surely taking the lead. Recently, Qualcomm was in the news for beating Intel (NASDAQ: INTC) in terms of market capitalization for the very first time.

With more people preferring to use their smartphones and tablets to do stuff commonly done on computers, Intel sees itself on the losing side because it hasn’t yet made significant inroads into the smartphone and tablet processor space. And Intel isn’t alone here. Texas Instruments (NASDAQ: TXN) decided to throw in the towel recently and called quits on the mobile processor business. The company stated that it will focus on embedded markets within the wireless space, which happen to have greater potential for sustainable growth.

Today, some of the most popular smartphones out there have Qualcomm’s tech under the hood. Take for instance Samsung’s latest Galaxy S3, which sports Qualcomm’s S4 processor. Even Apple’s iPhone connects to the super fast 4G LTE network using a chip manufactured by Qualcomm. But I’m not favoring Qualcomm just for these reasons.

Gaining ground

The company recently saw its fourth quarter earnings jump by 20% $1.27 billion, along with revenues in excess of 4.8 billion, up by 18% from the prior year period. But that’s not all; Qualcomm’s performance over the past 5 years reveals a steep upward growth trajectory. Here is a comparison of Qualcomm’s performance with its peers:

<img src="http://media.ycharts.com/charts/9e4b0d7e9e2bb1d3a859e8f839190aa3.png" />

QCOM Revenue Quarterly data by YCharts

Apart from Broadcom, Qualcomm has managed to grow revenues at a rate far higher than of its peers. How was it able to pull this off?

Well, it’s the way in which the company makes most of its profits. People who know Qualcomm very well would also know that it’s not only famous for its Snapdragon processors, but also for its valuable intellectual property in 3G and 4G wireless networking.

Qualcomm might be making the most revenue out of selling chips, but the company also makes the most profits out of its licensing business. For the year ended Sept. 30 2012, segment information from the 10-K report reveals that QCOM made almost two thirds of its revenue from its chip division (QCT) but made more than 70% of its profits before taxes from its QTL division which grants licenses or rights to use parts of Qualcomm’s intellectual property portfolio.

<table> <tbody> <tr> <td> </td> <td> <p>QCT</p> </td> <td> <p>QTL</p> </td> </tr> <tr> <td> <p>Revenues*</p> </td> <td> <p>12,141</p> </td> <td> <p>6,327</p> </td> </tr> <tr> <td> <p>Earnings Before Taxes*</p> </td> <td> <p>2,296</p> </td> <td> <p>5,585</p> </td> </tr> <tr> <td> <p>EBT as a % of revenues</p> </td> <td> <p>19%</p> </td> <td> <p>88%</p> </td> </tr> </tbody> </table>

Source: Edgar Online. *Figures in $ millions.

This is one feature I love about Qualcomm. The vast quantities of profits that the company makes from its licensing agreements serve as a great enabler for more research and development activities. This ensures that Qualcomm stays ahead of the game.

A Smart Future

Qualcomm’s Chairman and CEO Paul Jacobs promised a strong 2013 with double digit revenue growth mainly on account of 3G and 4G capacity expansion programs of many wireless telecom service providers. On the domestic front, the big three wireless carriers - namely AT&T, Verizon, and Sprint - plan to continue beefing up their 3G/4G network across the nation through 2013. 

In the coming months and years, more people are expected to shift from older 2G networks to more superior 3G in emerging markets such as India and China.

Research firm Gartner predicts that sales of Smart devices will top 1.2 billion units in 2013, up from 821 million this year.

The Foolish Bottom-line

With a $12.4 billion stash of cash and short term investments, and zero debt, Qualcomm’s financial position seems to be well fortified for growth. Investors also get a great bonus in the form of dividends, which Qualcomm has been increasing every year for the past 10 years. Moreover, with Texas Instruments calling it quits Qualcomm would certainly have more legroom for growth.

So what do you guys think of Qualcomm’s performance in the coming year? Feel free to express yourself in the comments section below. 


kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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