This Dominant Chipmaker Is a Buy

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

Those who keep a tab on the mobile computing industry need no introduction to Qualcomm (NASDAQ: QCOM), which is well-known as a leading player in the design, development, and marketing of digital telecommunication products and services. It has a large exposure to the mobile computing space, which some see as too much of a risk. But the manufacturer of the famed Snapdragon processors dominates the mobile baseband processor market like no other company, making it an intriguing prospect.

Recent report
Recently, Qualcomm reported an excellent second quarter, beating consensus estimates on earnings and revenue and encouraged by the results, it revised its outlook for fiscal 2013 upwards. Strong demand for its mobile chipsets was the primary reason behind a solid jump in revenue, which increased 35% from the year ago period to $6.24 billion, beating the estimate of $6.03 billion.

Excluding special items, adjusted earnings per share for the quarter were $0.92, a penny better than the consensus estimate. Qualcomm shipped 172 million MSM (Mobile Station Modem) chips, which was a healthy 22% growth as compared to the year-ago quarter.

The road ahead
Qualcomm has been winning orders for its Snapdragon line of chips from almost all important handset makers. Most of the high-end smartphone manufacturers like Sony, BlackBerry, and Samsung use Qualcomm’s chipsets. Qualcomm’s Snapdragon 800 quad core processors should gain market share as deployment of 4G LTE gains momentum in emerging markets like China and India.

China is definitely the largest market for smartphones. China Mobile, the world’s largest telecom operator, has plans to deploy around 20,000 TD-LTE base stations by the end of 2013. China Mobile has already selected Snapdragon and Gobi-based LTE-TD smartphones, since they are highly compatible with its network. This obviously augurs well for Qualcomm as it will create a huge growth opportunity for the company going forward.

Qualcomm’s Snapdragon 800 quad core chipset supports 3G/4G LTE modem with ultra HD graphics, besides offering more battery life and faster clock speeds of up to 2.2 GHz per core. This makes it an obvious choice for high end smartphones. The company will supply Snapdragon 800 processors to Samsung Electronics’s Galaxy S4 LTE-A phones.

Qualcomm is looking to profit from the broadband market in India, through its relationship with Bharti Airtel, the largest telecom operator in India. India has a huge telecom market with a minuscule 2% penetration of broadband services. Broadband is going to be a priority area of investment in the telecom sector in India to introduce LTE networks. Maintaining a relationship with the largest telecom operator in India is a sure way to get more traction for its LTE chips as Bharti Airtel will be using Snapdragon-based devices to support its 4G LTE deployment.

Other players
The market segment that Qualcomm operates in is not devoid of competitors eyeing a bigger market share. Pressure from such players will be one of the headwinds for Qualcomm going forward.

Intel (NASDAQ: INTC) has been feeling the heat as a result of a dwindling PC market. Intel, like most in the PC market, misjudged the impact of smartphones and tablets on the PC.

Intel is going to be one of the fiercest competitors as it is redesigning its chipsets to make a meaningful entry in mobile computing, which currently is held by processors based on the ARM architecture. Both Samsung and Intel are heavily invested in Tizen as both seem to have their own interests in doing so. Samsung wants an alternative to Android and Intel wants a handset manufacturer who has the capacity to build a handset based on Intel chips, and who can be better than Samsung on that front.

With Android controlling near 80% of the mobile computing space, a healthy competitor in mobile OS is definitely needed and both Samsung and Intel seem to be banking heavily on the Tizen project in order to meaningfully break into the virtual duopoly of Android and iOS.

There’s competition from NVIDIA (NASDAQ: NVDA), which manufactures the Tegra series of processors, with the latest iteration being Tegra 4. Tegra powers a few smartphones and tablets but is nowhere close to Qualcomm. One of the biggest disappointments for NVIDIA, however, has been the lukewarm response to Windows Surface RT Tablets. Qualcomm recently replaced NVIDIA in the second iteration of the Nexus tablet. The entire Tegra mobile chip revenue fell off a cliff in Q2, where NVIDIA made more money from licensing deals with Intel than it made from its entire line of mobile chips.

NVIDIA is being beaten up badly by Qualcomm since Tegra doesn't possess a LTE modem as of yet, with the Tegra 4i expected to address this shortcoming. But by the time NVIDIA brings its chip to the market, Qualcomm would have extended its lead.

Conclusion
Qualcomm is the undisputed leader in mobile baseband and it's not surprising that the company's market cap of $115 billion exceeds Intel, primarily a manufacturer of PC chips. Qualcomm supplies chips to various leading smartphone makers such as Samsung, Apple, etc. and this is a good reason to own the stock since the company is positioned to benefit from different players across the mobile spectrum.

Qualcomm trades at a decent 18 times earnings with a dividend yield of 2.10%. The stock isn't too expensive considering the company's growth and analysts are expecting 17% annual earnings growth over the next five years. All this makes Qualcomm a stock worth adding to the portfolio.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and 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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