This Company Wins the Battle Without Fighting

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

Even as Apple and Samsung struggle to expand their market and get the better of each other, Qualcomm (NASDAQ: QCOM) is emerging victorious without much difficulty. It dominates the mobile chip manufacturer market, and has good potential to deliver for its investors. Let’s see how.

Qualcomm’s current position

Qualcomm's Q1 2013 performance was phenomenal. Earnings and revenue both rose nearly 30% compared to last year. Apple uses most of the chips designed by Qualcomm. Though Apple has left investors skeptical about its future returns, Qualcomm has outperformed. The unparalleled performance by the chip giant is due to its relationships to other tech companies such as Samsung, Nokia, and HTC.

The company owns a number of patents that provide it with a steady flow of revenue. This should improve further, as licensing revenue is expected to grow 17% in the current year. Qualcomm receives a handsome 5% of the price of handsets on all CDMA-enabled 3G devices and the 3G network is nowhere near its saturation point.

Last year, Qualcomm shipped 86% of the total 47 million LTE-capable chips, which shows its supremacy in the LTE market. The company receives around 3.2% of the price of a 4G LTE network-enabled device as its revenue. Currently, the amount of data traffic through 4G is only 1% of the total wireless traffic, but it is expected to grow tenfold in the next five years. That should give the company’s top and bottom line a major shift upward.

Moreover, Qualcomm is sincerely dedicated towards mobile processors, with its chips powering Nokia's Lumia phones, BlackBerry's new BB10, and Samsung and HTC phones and tablets. Qualcomm’s patents and processors perk up its position to benefit from future growth of 4G mobile, even as its 3G business still has a lot of potential as well.

The company has a clean balance sheet, with debt of only $60 million and a cash balance of $12 billion. Qualcomm without doubt is trading at a premium, with a P/E ratio over 18, while the industry P/E averages around 15 times. But that premium is well-supported, given that Qualcomm is operating at a net margin of 32%. Furthermore, its five-year annual revenue growth clocks in at 17%, and the company's sales are expected to grow by 25% in 2013.

Let’s game it up

NVIDIA (NASDAQ: NVDA) has ruled the PC graphics and performance segment of the market, and it's now making tablets, smartphones, and handheld gaming its new focal point. Lately, Qualcomm has benefited from the rumors that its processor will be used in Google’s next version of Nexus 7 tablet rather than NVIDIA’s Tegra 3.

The actual picture still remains unclear, because if Google wants a single source, it can still depend on NVIDIA. NVIDIA’s Tegra 4 is now attuned with 4G LTE, resolving the concern that would have been relevant last year, when it had not made its Icera basebands LTE-compatible. Moreover, the report claims that Google is eyeing the standalone APQ8064 chipset rather than LTE-integrated MSM8960. But it's a little difficult to believe that Google would choose an older Snapdragon above the most recent Tegra.

The rumors have definitely affected NVIDIA, but its recent quarterly results which were better than the analysts estimate, should relive the investors a little. Moreover, if the rumors are not true, there can be further upside.  If the HPC market continues to grow and the "Tesla" HPC cards persist, it will boost the company’s profitability.

The company is in a good position to benefit from the growing PC gaming market. NVIDIA’s integrated Tegra 4, which is up to six times more powerful than Tegra 3 and LTE baseband compatible, should start delivering results in 2014. Currently a lot of uncertainty surrounds the company, but with the passage of time things should definitely move in its favor. I would just say, “Investors, be patient. NVIDIA should deliver in the long-run.”

The new entrant

Broadcom (NASDAQ: BRCM) is the latest company to enter the LTE network, which is positioned to be available for use next year. Its LTE solution will be one-third the size of its rivals and will support all major technologies and standards. Further, the chip will offer a speed of up to 150 megabits per second. The company’s chip is planned for flagship smartphones and tablets, which means it is targeting Apple's iPhone 5 and the 4G-enabled iPad, which currently operate on Qualcomm’s LTE chips.

Broadcom’s revenue has grown year-over-year and it has a very low debt-equity ratio of 0.23. Its net operating cash flow has increased to $621 million, and with a quick ratio of 2.09 it is fairly liquid. Broadcom currently trades a P/E of 27, with a forward P/E of 11 and PEG ratio of 0.81, signaling significant growth in the future. It is a good stock to diversify an investor’s portfolio. 

Final words

Qualcomm is clearly the best pick of the lot when compared to its peer for two reasons -- 1. Its revenue stream is more or less certain as it collects fees for its licenses and patents, and 2. It is the only player in the 4G LTE baseband processor market in 2013 as no other competitor will start commercial production before next year. Even when competition seeps into the 4G market, there is not much to be concerned about as the market is going to broaden with time.

Nvidia too is a good stock but its real picture would be clearer in the coming year if Tegra 4 starts delivering results. Broadcom is new in chip manufacturer industry but has strong fundamentals, and might turn out to be a good pick for investors

tarunbachhawat 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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