This Stock Will Keep Investors’ Smile Intact

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

Qualcomm’s (NASDAQ: QCOM) latest quarterly numbers clearly depict that it has benefited from the enormous demand for smartphones. Revenue for the fourth quarter increased 29% from last year to $6.02 billion. Net income of $1.9 billion represents a 36% boost on an yearly basis. The company has kept investors happy over the last few quarters. Let’s see if it can continue to give them a reason to smile this year.

The present position

The stock has continuously risen this year, and to add to investors’ joy, more cash will be flowing towards them. Qualcomm is increasing its yearly dividend to $1.40 a share, a 40% hike which takes the yield to 2% at its current price level. Further, the company has introduced a new stock repurchase plan of $5 billion, replacing the previous one which had $2.5 billion left. 

I believe, that the since the stock is going strong, there was no need for a share buyback program to support it. Nonetheless, it will definitely add to investors’ returns.

The company presently is the market leader in developing and marketing CDMA technology. It owns a bundle of licenses, patents, and trade secrets related to the CDMA technology which it uses in its personal products, and it also licenses to other companies. Qualcomm charges a certain percentage of the price of the phone, assuring its revenue stream in the near future.

The opportunities

The smartphone market has grown, and the continued momentum makes it look almost certain that the market should cross the 1 billion mark by the end of 2013. Tablets sales are also on the rise, and IDC estimates the tablet market to reach 260 million by 2016. Qualcomm is poised to grow from emerging markets like China and India, where a transition from feature phones to smartphones is taking place .

Moreover, China provides a tremendous opportunity for Qualcomm with a boom in demand for 3G enabled smartphones. A strong mobile subscriber footing, and the shift from 2G to 3G in India and China, represents a vast opportunity for the company to benefit from the sale of its chipsets, besides steady licensing fees.

Qualcomm commands more than 50% market share of the growing cellular baseband market. It enjoys nearly a monopolistic control over the budding LTE baseband market, which is clearly evident from the fact that it shipped 86% of the 47 million LTE-capable chipsets shipped in the preceding year. Further, Qualcomm is in its third-generation of chipsets, while competitors are bringing their first LTE baseband chips to the market.

The company’s far-sighted outlook, and its practical strategy to make its baseband chips LTE-compatible, and incorporate them with its Snapdragon processors, have given it a leading edge. Qualcomm's latest RF360 further improves the company’s stand by letting handsets work on most LTE frequencies. 

The competitive ground

Qualcomm is seeing some competition from the likes of NVIDIA (NASDAQ: NVDA) and Broadcom (NASDAQ: BRCM). NVIDIA’s Tegra 4i mobile LTE chip will contest Qualcomm’s Snapdragon S800 for efficiency and battery life. It has already imprinted a noteworthy market share for tablets with its Tegra SoC, and it would be rather interesting to notice whether it can create its own market in the near future.

The company will start commercial production by the end of this year or by the beginning of 2014. NVIDIA recently showed a running version of "Grey," a baseband and apps processor in a sole die, which should provide it a way into the growing smartphone market.

Broadcom, too, recently launched its LTE chip which will go for production in 2014. The chip's prime differentiating factor is its size, which is almost 35% smaller than peers apart from being economical and efficient. The company leads Wi-Fi, Bluetooth, and GPS technologies, and the addition of the 4G LTE modem provides it with a broader product offering required to fabricate superior mobile devices.

According to Strategy Analytics, the company has improved its product mix and currently ranks fourth in the cellular baseband market. Its 3G baseband shipments have grown over 6 times in the first half of 2012. Thus, Broadcom is showing continuous signs of improvement.

Final words

On one hand, where other companies have come up with a modest guidance for the future, Qualcomm is positive about its prospects and has thus increased its earnings guidance to $4.25-$4.45 per share from the previous range of $4.12-$4.32. Though there is growing competition in the LTE baseband segment, Qualcomm should manage its lead and tap profits through the growth of this industry. At a P/E ratio of 18 times, which is well below the industry average, and the highest P/S ratio of 5.60, the company is a good fetch for long-term investors.

tarun bachhawat 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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