Chipmakers Are Going to Make It Big

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

There are a few companies that have been behind the great Apple or Samsung experience that we have as an iPhone or Note 2 user. As a consumer, the semiconductor companies have earned my respect by delivering good products. Let’s take a look at the industry from an investor’s standpoint.

The industry veteran

Intel (NASDAQ: INTC) is the largest semiconductor company at the global level in terms of revenue. It has been a very smart company to adapt the changes in the industry over the last two to three decades. The company has currently announced that it will offer TV content through web-based services, which is motivating as the company is looking forward to diversify away from its PC and server businesses.

The company currently has an incredible portfolio of patents and manufactures powerful processor chips on a commercial scale. Whereas its competitors depend on foundries; the company’s integrated model has proved beneficial for it. Intel invests a lot in capex to stay competitive and has spent $10 billion in 2012.

Major tech companies have a rivalry among themselves but Intel is in an advantageous position as it is in partnership with all the major players in the industry. Microsoft and Intel have a history together as their Wintel duopoly has conquered the technology industry. Lenovo, which is looking to diversify from PC, has approved to use Intel's processors for its smartphones. The company also has good relations with Nokia and Google. In short, the flow of Intel’s top line looks perennial in the future.

The company has a strong balance sheet and has a net cash of $8 billion. This cash cushion helps the company in funding its R&D expenses easily. Further, it returns a great amount of cash to its shareholders in the form of buybacks and dividends. Intel’s current yield is around 4.5% (at a payout of 40%) and it bought back shares worth $5 billion in 2012.

Intel is trying to adapt to the changes with time. Apart from increased focus on tablets and smartphones, it is sincerely working on its software and security. In order to improve security of its hardware products, the company purchased McAfee. There have been serious security breach issues off-late, and if Intel is able to provide a more secured product then it will earn a lot of business.

Intel is a remarkable company and is way ahead of its rivals on R&D and manufacturing Facade. The Company’s PC and server processor business provides a stable cash flow at present and its steps towards diversification should benefit it in the long run; till then investors can enjoy the amazing dividend yield. It is currently trading at a deep discount at a trailing P/E of 9.3 which is less than half of the industry average. This is a good stock to BUY at its current prices.

Another smart player

Qualcomm (NASDAQ: QCOM) is another major player in the industry which looks fairly priced with a P/E ratio of 17, a robust balance sheet, strong cash flow, and current dominance in communication processor market, vindicates its current valuation.

The company currently has an extensive market for networked mobile device, and collects heavy license fees from other companies for its flagship CDMA chips. At present, Qualcomm is the only company with a viable 4G solution and with no direct competition affecting it before early 2014. The 4G LTE baseband hardware is an expanding business as only 1% of the total data traffic is through 4G. With a portfolio of patents in 4G LTE technology, Qualcomm assures a stream of revenue in the future too.

The company’s Snapdragon chips are currently leading the mobile and smartphone market. “Snapdragon S4” processors will further strengthen the company’s position as they are 4G compatible. It consistently spends a lot of cash on R&D to enjoy its competitive edge in the market.

Qualcomm had a cash pile of $28.4 billion and a strong balance sheet. It has outperformed most of its competitors with a return of 55% in the last five years. It has a decent yield of 1.7% which can act as a bonus for shareholders apart from stock price appreciation. Currently it is earning most of its profits through patents and royalties which makes it the safest bet in the technology sector. I recommend a strong BUY.

Other player in the game

NVIDIA (NASDAQ: NVDA) is the new wannabe in the mobile processor market, and wants to establish itself with a new chip, "Tegra 4i," a quad-core,  ARM Cortex A9, built on TSMC's 28nm process that is compatible with LTE modem.  The company is trying hard to succeed through its Tegra processors in the near future, but it will take time.

Moreover, the company has a low guidance for the coming year because of lower GPU sales, and lower sales of Tegra 3 due to launch of Tegra 4. The company’s market share is growing in the notebooks and supercomputers market which is shrinking, as it is being taken over by tablet. NVIDIA’s i500 modem is not CDMA compatible and spells bad news for the company. This restricts Sprint and Verizon to carry its phones and thus eluding a great market from it. The silver lining is that Tegra 4i based devices will possibly not charge royalties from their vendors making it a more viable option than Qualcomm.

Investment in the company is an investment into the future which has its own uncertainties surrounding it. 2013 should not be very fruitful for NVIDIA as all its major products will go into production in late 2013 or early 2014. At present I am not very optimistic about the stock and would suggest investors to stay away from it.

Final words

Intel is an intelligent company which is adapting well to the changes of the market. It has a very strong portfolio of client that assures stable revenue flow. The current dividend yield of 4.5% also attracts income based investors. I am bullish on Intel.

Qualcomm is the market leader in supplying mobile chips and thus is poised to gain because of its current position in a growing industry. The stocks have performed well over the last few years and continue to do so in this year too.

I would suggest NVIDIA for investors who can be patient with their money even it does not provide return in this one year. The prospects for the future look good and I believe your investment today should reap benefit a year later.

tarunbachhawat 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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