Make Hay While the Sun Shines With This Stock

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

Semiconductor manufacturer Qualcomm (NASDAQ: QCOM) seems to have bucked the trend once again. Thanks to disappointing earnings results reported by smartphone manufacturing companies such as HTC and Samsung Electronics, industry watchers became worried about signs of a slowdown in smartphone adoption around the world.

But then, with Qualcomm’s revenue and net income both remaining above Street expectations in its third-quarter results, such doubts seem to have been dispelled, at least for the time being. And the situation seems to be doubly reassuring, given the fact that Qualcomm’s results have become a bellwether for companies manufacturing chips that are largely directed towards mobile devices such as smartphones and tablets.

However, even if things start slowing down at a later period, here’s a lowdown of why Qualcomm should comfortably be able to make it through the tough times.

The good things that have happened

The primary factor that seems to have worked in Qualcomm’s favor is the increasing trend of transition from 2G to 3G technology-based networks in emerging nations such as China and India, a fact which I had outlined in my previous blog. Given the massive population in these countries, that is a very welcoming trend for Qualcomm. That’s because it leads to a distinct possibility of more and more customers upgrading their handsets into better and ‘smarter’ varieties, translating into higher ‘average selling prices’ of such handsets -- a key determinant that has worked in favor of Qualcomm in its latest reported quarter.

Apart from the transitioning trend, wireless telecom carriers are also offering more incentives for customers wishing to upgrade their handsets. And then, there’s the certainty of more handset releases in anticipation of the upcoming holiday season. All these factors have, in turn, boosted the confidence of Qualcomm’s management, as its declaration of average selling prices for the rest of the year exceeded earlier company predictions. Going ahead, the company’s prediction of current fourth-quarter revenue has also exceeded analysts' expectations.

The 4G LTE factor

Talking of incentives, even wireless carriers in developed regions are offering them in greater degrees, as the carriers race ahead of each other to upgrade networks from older 3G technology to more advanced Long Term Evolution (LTE)-based technology. And, it’s an obvious assumption that the benefits of a 3G to 4G based technological transition are enjoyed mainly by Qualcomm since it has the first-mover advantage in this area.

While rivals such as Intel (NASDAQ: INTC) and NVIDIA huff and puff at their attempts to design 4G integrated chipsets, Qualcomm is already generations ahead and enjoys a whopping 86% share of the global 4G LTE-enabled chipset market.

The competition

And while rival NVIDIA is presently concentrating on licensing its graphics technology to customers, apart from building a gaming console named Project Shield, chip behemoth Intel is forever ramping up its efforts to prove itself as a worthy competitor to Qualcomm. Not that it has had much success though. With less than 1% share of the market for chips manufactured for mobile devices, Intel continues to be a laggard in this area.

And while Intel’s ‘Atom’ line of processors have somewhat changed its previous ‘high energy at the rate of high power’ perception, it still hasn’t found a proper foothold with regard to LTE-enabled chips, one of Qualcomm’s primary areas of strength.

The ability to swim against the tide

But then again, what happens when the smartphone upgradation cycle displays somewhat inevitable signs of a slowdown? Will Qualcomm be in a winning position even then? If you ask me, the answer is yes, and that’s what actually makes this stock one of my firm favorites.

It’s true that consumers in emerging markets are more cost-conscious than their counterparts in developed regions, and a large section of them may opt for less expensive handsets, even as the ‘2G to 3G’ technology transition takes place. This may lead to lower profit margins on chips that Qualcomm manufactures for such low-end handsets -- a fact which has already been acknowledged by the company while declaring earlier quarterly results. Added to that, the company also faces a threat from local manufacturers of far more inexpensive chipsets.

However, as I said earlier, given the massive number of consumers in emerging markets, the sheer volume of sales of its 3G-enabled chipsets should bode well for Qualcomm. In fact, the number of newly upgraded 3G users is expected to go up to a jaw-dropping 2.8 billion, as per research firm Wireless Intelligence. And it is here that royalties play a big part for the company, as 3G-based royalties on chipsets tend to be higher than 4G-based ones. That’s a clear advantage set to work in Qualcomm’s favor in the long run.

ARM’s army marches on

Coming to the question of royalties, that’s also something which is working very much in favor of ARM Holdings (NASDAQ: ARMH), a company that licenses its chip designs to manufacturers such as Qualcomm and NVIDIA. In fact, with increasing royalties on ARM-designed chips that have been marketed by companies like Qualcomm, it seems to be a smooth road ahead for ARM Holdings for now. And with increasing demand for the company’s energy-efficient Cortex-A chip designs targeted at the mid-range handset market, ARM looks set to dominate over chipmaker Intel, as well.

My Foolish takeaway

Qualcomm has a lot going for it at present and its Snapdragon line of processors continues to be the industry benchmark. The company counts biggies such as Apple and Samsung Electronics among its customers, and with both handset makers expected to launch pathbreaking phones in the future, Qualcomm should be laughing all the way to the bank. And with Google deciding to use a Snapdragon processor for its latest version of the Nexus 7 tablet, things should only get better from here on for Qualcomm. This is one stock that you should definitely add to your tech portfolio, if you haven’t done so already.

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Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel. 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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