A Technological Chip Firm Poised for Future Success

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

Anyone who has paid attention to the ups and downs of technological chips throughout the last few years will not be surprised to learn that, in a fiscal quarter primarily stricken with lower returns and weak performance, Qualcomm (NASDAQ: QCOM) rose above the crowd. Not only is Qualcomm poised for continued revenue gains, the firm’s tenacity to increase spending has compelled competitors to bring their “A” game as well. Despite the existence of far cheaper chip investment options in the market, Qualcomm offers one of the most significant and lucrative investment options with regards to its ability to drive current results and future prospects.

While Qualcomm does not have a reputation for consistent out-performance, it is no surprise when it does beat expectations. With the widespread adoption of the popular Snapdragon chip and the increasing ramp-ups of 4G LTE networks through clients such as Apple and Samsung, Qualcomm is in an exceptional position to dominate the market.

Impressively, profits in the fourth quarter climbed by nearly 18% when compared to last year’s results, resulting in Qualcomm achieving status as one of only a handful of semiconductor companies to deliver tangible upside to sell-side estimates. Licensing revenue also experienced a 15% spike over last year’s results, and chip revenues increased by 21%.

Profit and margin performance were a little more diverse. The anticipated gross margin came in as forecasted on a non-GAAP and was comparable on a GAAP basis. Essentially, this performance can be viewed as being on track, given the lower gross margin associated with a higher proportion of chip revenue topping the charts.

Qualcomm's Proactive Spending Habits Driving Competitors Out of the Market

Despite investors’ eagerness to discount firms reporting substantially higher operating expenses, there are indications that Qualcomm will experience rapid success in the coming years. A significant amount of current spending can be attributed to the ongoing research and development of next generation baseband products and continued improvements in products and technology for mobile devices leveraging ARM Holding (NASDAQ: ARMH) engineered technology.

When looked at in a different light, it is becoming progressively more complicated and costly for businesses to remain competitive in the integrated chip market, especially given increased demands from front-running clients like Samsung and Apple. As a result of the complexities in the industry, previously successful organizations like Texas Instruments (NASDAQ:TXN) have made the decision to cease operations in the mobile system on chip business. Many people speculate that this abrupt exit from the market comes as a result of the costs associated with maintaining a competitive edge in such a technologically-driven industry. It is believed among analysts that other companies will soon follow suit. The reality of it is that the intimidating spending practices of Qualcomm may, in fact, be driving competitors out of the market.

If the organization’s strong investments in research and development are any indications of future success, Qualcomm has positioned itself to maintain a leading role in the mobile / wireless chipset industry. However, this is not to say that the market it prepared to accept the company at full value. While Qualcomm currently entertains very strong positions with two of the leading mobile device companies, history has indicated that Samsung has a predisposition for moving towards internally developed products and Apple has always been driven by price and performance.

This is not meant to suggest that Qualcomm should sever business ties with either Apple or Samsung; however, it may be in the best interest of the organization for competitors such as Sony (NYSE: SNE) to begin to retrieve some of their market shares before the very companies Qualcomm supplies turns into its newest competition.

As far as chip companies go, Qualcomm is one of a select few that have been capable of increasing their performance and revenues on a consistent basis, resulting in management striving to meet a targeted increase of 10% over the previous average revenue estimates. It has been forecasted that Qualcomm may not experience favorable operating leverage throughout the next quarter – however, this does not put them out of the game.

The Final Recommendation

The estimated growth is fairly attractive, making Qualcomm an excellent option for new investments currently. With competitors bowing out of the game in record numbers, there has never been a better time to delve into Qualcomm.

 


muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Qualcomm and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend ARM Holdings. 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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