This Chip Company is the Future of Telecom
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chip giant Qualcomm (NASDAQ: QCOM) recently reported its quarterly results, which beat estimates. Its revenue grew 29% from $4.68 billion last year to over $6 billion, beating the analyst estimate of $5.90 billion.
Investors usually start selling their stake in Qualcomm once Apple (NASDAQ: AAPL) misses its targets, totally ignoring all its positives sides. Let us take a look at how well the company is positioned by itself and not dependent on Apple for its survival.
Qualcomm has a very wide market for networked mobile devices, and it provides almost every known service relating to modern wireless communications. It collects heavy license fees from other companies to make CDMA chips, the technology in which it is a pioneer. The company’s chip business is highly profitable and growing.
The company also supplies the heart of a mobile phone: its processor. The Nokia Lumia 920, the Finnish giant’s flagship, runs on Qualcomm's Snapdragon processor. Furthermore, Qualcomm’s dominance in 4G LTE baseband chips has led to the adoption of its Snapdragon S4 processors. Snapdragon processors are one of the best in class and the company continuously remodels them to suit the needs of its users.
A bright future
Currently in the market there is no other company apart from Qualcomm that has a viable 4G SoC solution, giving it a competitive hold in the market. Competitors will eventually enter the market but not before early 2014, till then the company can enjoy its near monopoly situation. Moreover, the 4G LTE baseband hardware is an expanding business which will not let competition affect Qualcomm’s market share.
The company’s customers such as Apple, Samsung, and HTC, among others, should surely help its business in the near future. Whereas Apple now dominates the U.S. market, Samsung and HTC are expanding in the emerging market, placing Qualcomm in a win-win situation.
Qualcomm has always kept its focus on customers, which always puts it a step ahead of its competitors. It spends heavily on R&D and comes out with products customers want, helping the company avoid market saturation.
The falling Apple
In the past three months Apple has tumbled by more than 30%, from as high as $702 in mid Sept. to the $450 mark currently. There are two main reasons for this fall, firstly the consumers have become smarter and secondly the competitors are producing better products.
There is no major difference in terms of innovation in iPhone 4, iPhone 4S, and iPhone 5 that can attract customers towards them. Moreover, the Samsung Galaxy SIII and the Galaxy Note 2 are faster, more innovative, and competitively priced in comparison to iPhone 5, attracting customers to their side.
Being an Apple loyalist myself, I believe that the company is losing its innovation. What Apple still has on its side is very strong customer loyalty as people are still buying the iPads and the iPhones because Apple is producing them.
A major competitor of Qualcomm in the semiconductor industry is Broadcom (NASDAQ: BRCM) with its chips ranging from mobile devices, set-top boxes, to network equipment. It also enjoys close relationships with smartphone giants Apple and Samsung. The iPhone 5 and the 4th generation iPads are powered by Broadcom’s chips. The company’s chips are also placed in many of the Galaxy devices, and with the growth in the sale of smartphones in the emerging markets things should get better for it.
The company is well positioned to tap the growth in near field communication (NFC) technology. Its connectivity combo SoCs are gaining acceptance, which is clearly evident from the 200 million units that were shipped in the previous quarter. With so much to deliver, and at a forward P/E of 11 times and PEG ratio of less than one, it looks like a solid company to invest in.
Qualcomm dominates the mobile chip industry, and is simultaneously growing with a diversified portfolio of businesses. It is well positioned to dominate the networked mobile market with a further boom in the use of smartphones in the emerging markets. The company has a robust balance sheet with a cash balance of $28 billion and no debt. At a trailing P/E of 18 and a forward P/E of 13, Qualcomm is a definite buy.
tarunbachhawat has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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!