Smartphone Decline Be Darned

Marshall 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), the designer and maker of digital wireless telecom products, saw a big pullback in its stock last week despite posting in-line EPS numbers. The real fear is that total smartphone sales could be slowing, which were affirmed by Apple and Samsung's guidance earlier last week. However, is Qualcomm's pullback exaggerated, and could this be a great entry point for investors? 

After the big pullback, the stock is now down more than 3% for the past 12 months. 

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Qualcomm has significant exposure to the 3G wireless tech market and smartphones in the emerging markets, particularly in China. Globally, approximately 85% of wireless networks support 3G technologies. With wireless companies shifting to the next-gen 4G Long Term Evolution (LTE) technology, Qualcomm should see further growth, given that mobile handset manufacturers have to develop phones that will be compatible with this network.

The recent headwinds include the Financial Times reporting that Samsung reiterated a cautious outlook for the smartphone market, reporting that Samsung is forecasting flat smartphone sales in the second quarter, which is in line with chief rival Apple's recent warning. However, first-quarter numbers for Samsung came in pretty stellar, with the company shipping 70 million smartphones during that quarter, growing 60% from the year ago quarter.  

What's more is that during the first quarter of fiscal 2013, Qualcomm shipped 182 million MSM chipsets, up 17% year over year. This figure was far better than the company's guidance of a mid-point of 173 million. Qualcomm also reiterated its full-year revenue between $24 billion and $25 billion, which is up from its prior forecast of between $23.4 billion and $24.4 billion.

The tailwinds 

  • Even with the recent poor guidance by the likes of Samsung and Apple, Gartner expects the tablet and smartphone market sales to grow 9% in 2013. This, thanks in part to the fact that smartphones are becoming more affordable, is being driven by adoption in emerging markets and the prepaid segment in mature markets.
  • Of the 1.875 billion mobile phones expected to be sold in 2013, one billion units are forecast to be smartphones, compared with 675 million smartphone units in 2012.
  • Qualcomm's chips are not only in the higher-end smartphone devices, but also the cheaper handsets that are popular throughout Asia and developing nations. 
  • Although smartphone shipments might be slowing, the growth is still robust. The global smartphone market is likely to expand 27% this year, according to IDC. 

Key Competitors

Broadcom (NASDAQ: BRCM) is a global semiconductor solution for wired and wireless communications. Broadcom focuses on technologies related to connectivity, bandwidth and content.

The continued expansion of pay-TV and Internet-access services internationally, especially in China and India, provide significant opportunity for growth. As well, adoption of high-definition pay-TV services and consumer preferences for HD content are other key drivers. Broadcom also has agreements with major firms like Cisco, Nortel and Sony.  

For Broadcom's first-quarter results, it posted EPS of $0.33, compared to $0.15 for the same quarter last year. The year-over-year increase in earnings was primarily driven by a better-than-expected performance by wireless baseband and connectivity chips. However, I still like Qualcomm for its greater exposure to the mobile industry. 
Another major chipmaker is Texas Instruments (NASDAQ: TXN), which designs and makes semiconductors and sells them to electronics designers and manufacturers globally. The company's guidance for the second quarter includes revenue estimates of $2.93 billion to $3.17 billion, which is down 5.7% sequentially at the mid-point. Most notably, its legacy wireless products are expected to decline by around $60 million, or 30% sequentially next quarter. 
Texas Instruments also expects to continue spending aggressively on research and development to help the company enter higher-margin and higher-growth markets, which include gaining more exposure to industrial and automotive markets. The last few years have also seen other analog companies, such as Linear Technology and Maxim increasing focus on these areas, and they generate higher margins. 
The other headwinds for Texas Instruments is the apparent decline in the PC market. Much like its top peers, Intel and AMD, caution is suggested for Texas Instruments, given end-user concerns related to a slow economy. 

The hedge fund trade

Going into 2013, Qualcomm, by far, had the most hedge fund interest. There were a total of 89 hedge funds long the stock. This includes the top position holder, Viking Global, with a $708 million position in the stock and comprising 4.9% of its 13F portfolio (check out Viking's high upside picks).

Meanwhile, Broadcom had a total of 37 hedge funds long the stock, with notable billionaire Ken Griffin of Citadel Investment Group having the largest position (check out Griffin's dividend picks). Other notable billionaire, David Tepper's Appaloosa Management was in the second spot. 
Texas Instruments had the least interest of the three, with only 23 hedge funds long the stock, however, this was up 28% from the third quarter. The top owner was First Eagle Investment Management, with a $376 million position in the stock, comprising 1.3% of its 13F portfolio (check out First Eagle's dividend stocks). 

Don't be fooled

Qualcomm saw a nice pullback last week, potentially providing investors with a great entry opportunity. The company pays investors a 2.2% dividend yield and is stellar at generating returns for shareholders. Qualcomm's return on investment is upwards of 17.7%, compared to Texas Instruments' 10.8% and Broadcom's 8.9%.

Meanwhile, Qualcomm also has one of the best balance sheets, with nearly no debt; the company's debt ratio is a mere 0.05%, whereas Texas Instruments is 28%, Intel 16% and Broadcom 15%. These are all positives for the company and should allow it to better hedge any interim declines in smartphone shipments. And although the smartphone growth might be slowing, it's still growing robustly, not to mention the fact that Qualcomm has exposure to the lower-end mobile market that's popular in emerging markets. 


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Marshall Hargrave 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!

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