Cashing in on The Chips

Shaleen 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) reported earnings on Jan. 30, beating expectations on both the revenue and the earnings front. Revenue for the first quarter was $6.02 billion, 29% more than $4.68 billion reported in the previous year quarter and $120 million more than the top-line estimate of $5.9 billion. EPS for the quarter was $1.26, 30% more than the same quarter last year.

The chipmaker is strongly positioned in the industry with supplies to all the major smartphone makers and dominating almost half the market share of baseband chips. Apple constitutes 15%-20% of the company’s business, but Qualcomm is an important supplier for other big names like Samsung, Nokia, and HTC. So, even if Apple loses some market share it would not affect Qualcomm’s ability to sell its products to other players in the telecom industry, thereby helping the company to maintain its earnings capacity.

Looking at the future

Qualcomm collects 3%-5% of the sale price of every CDMA-enabled device fitted with Qualcomm’s chips because of patents. But, the future is moving towards tablets and more powerful smartphones. Currently, Qualcomm’s share in the tablet processor segment is just 4%. Nevertheless, the company is committed to bringing out new products for the tablet market as well. It plans to launch two new tablet processors this year, the SnapDragon 600 and 800.

Qualcomm dominates market for CDMA technology used in 3G and 4G devices. LTE baseband chips are essential for devices to use fast wireless networks and Qualcomm is the only manufacturer catering to the needs of the segment. As the smartphone market grows, the company will undoubtedly benefit whether it is led by Apple or Samsung.

Chips of a different flavour

Broadcom (NASDAQ: BRCM), a major competitor of Qualcomm in the semiconductor industry, reported its earnings for Q4 and the full year on Jan. 29. The EPS for the quarter was $0.76, higher than $0.68 in the same quarter last year. For the full year, earnings were up from $2.89 per share last year to $2.92 per share.

Broadcom manufactures chips for mobile devices, network equipments, and set-top boxes. The company supplies chips to Apple and Samsung for their mobile devices as well as tablets. Apart from making Bluetooth-WiFi chips for the iPhone, the company has also added Nokia to the list of its customers.

The current quarter might be a slow one for Broadcom as sales of electronic devices tend to decline after the holiday season, but the company has strong growth potential as the smartphone and tablet markets reach new heights. The company has a good record of revenue growth and has strong cash flows. The company has a robust balance sheet with a debt-equity ratio of 0.23 coupled with opportunities to grow margins.

Visually Delightful

More competition for Qualcomm could come from NVIDIA (NASDAQ: NVDA), which has unveiled a number of powerful Tegra 4 products. The company specialises in making chips that provide high end graphics, the preferred choice for gamers. NVIDIA is close to introducing Grey, an integrated System-on-a-Chip (SoC) to the market to compete with Qualcomm. But Qualcomm doesn't have to to worry about it. If rumors are to be believed, NVIDIA could be manufacturing tablets and smartphones for other companies which could help it make new customers in the form of Chinese companies targeting on the low priced tablet and smartphone market.

Let’s Pick

Qualcomm is a leader in the mobile chip industry, and will definitely benefit from the dominant position it holds until there is some fierce competition from other companies. This is seldom likely to happen in the near term. The company expects strong sales growth and has raised its fiscal 2013 revenue and earnings guidance. Whether it is Apple or Samsung, Qualcomm will be the winner.

Broadcom has a very low debt-equity ratio and a forward P/E of 11 times. Macroeconomic factors and seasonal variations may have led Broadcom to think conservatively about its guidance, but the company has strong fundamentals and the capacity to maintain its foothold in the industry.

As far as NVIDIA is concerned, there are a number of rumors doing the rounds, and going by the history of it the stock price reacts to news. At these levels the stock looks cheap, but I’ll be cautious to create any position now.

shaleenlohia has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. 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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