Qualcomm and Nvidia: Feed your Portfolio Some Chips

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

Qualcomm (NASDAQ: QCOM) is one of those companies that is behind the veil. Investors know about it but the casual consumer who is not heavily into technology might have heard the name in passing, but nothing specific. It might come as a surprise how important the company is in the smart phone marke, much in the same way that the casual consumer would be surprised at how ARM Holdings (NASDAQ: ARMH) is everywhere.

Qualcomm's Dominance

It would be nice if Qualcomm declined more on the news that Apple was ordering less iPhone units. Qualcomm makes the mobile-station modem chip used in the iPhone, but it is also used in other smart phones like ones from Samsung and HTC. Apple is a significant customer, but it is scaling back production, and there are other large customers. There might still be time for the market to make a mountain out of a molehill, but it looks like there is not much damage done. Investors of Qualcomm will just have to rely on the massive growth of the smart phone market to make gains for the company.

Qualcomm has a significant market share in the app processor and cellular baseband markets, and a diverse customer base. That is a nice position to be in. The company also announced a new chip called Snapdragon that should keep the company in contention as the market advances. Nvidia (NASDAQ: NVDA) also just announced the next version of its successful Tegra chip. Making sure that the chip you sell can compete in the intense market is important. Most companies get to choose what goes in their phones on a regular basis. The iPhone gets a new version yearly, and other companies come out with new phones regularly. Qualcomm is not just a one chip company and there are other aspects of its business like patents and other things, but smart phones are the most interesting.

Qualcomm has a nice balance sheet with a ton of cash and no debt. A recent Fool article mentions that most of Qualcomm's war chest is held overseas. If that is the case, then the numbers are even better. Having over $1 billion in free cash flow is really good and should give the company some flexibility when opportunities arise. The company has really high margins, and honestly, looking at the key stats, there does not seem to be anything to dislike. The three year yield is just 34%, so the company has not really improved it that much in recent memory, but it is a respectable amount. If the stock flattens out, a dividend will be the best way to return value to shareholders. I am sure buybacks will occur before dividends, though.

Nvidia Mixes It Up

Turning to Nvidia, which operates in the same general sector, you may not see the dominance in the one market like you see with Qualcomm, but Nvidia is branching out into a handheld video game device. Project Shield looks amazing, and I really like this move for the company. I think it is different, while still a part of Nvida's expertise. Graphics and energy efficient high-power chips are well within Nvidia's capabilities. There really is not much else to a mobile gaming device. Having top-notch graphics and enough processing power hooked up to a nice screen with a good battery is all you really need.

Nvidia's key stats look good too, but not Qualcomm good. For one thing the 3 year return leaves much to be desired, but at least there is no concern about it being too late to enjoy the upside. Considering that the company has been making money and earnings have been growing at least steadily, it seems like Nvidia would make one want to smack the computer screen to see if it was possible to shake the price loose. Sadly, that will not work, but fundamentally strong companies will have their day.

ARM Sits in the Back of the Class

The silent partner in this entire saga is ARM, which manages to garner the benefit of direct sales of chips, and chips designed around its instruction set. The company has been around for a long time, but it was not until the 2000's that it really got its due as the demand for energy-efficient, powerful processors has risen. If the company were not so expensive with a high PE it would be a no-brainer investment. However, it will share in the growth of tablets, smart phones, and servers, so there might be something there.

I would limit my position in ARM, because licensing revenues will never match product sales revenues. ARM is not getting 10% of every iPhone sold; the revenues are far lower. The company is doing fine fundamentally speaking, with plenty of cash, low debt, and increasing revenues.


TheArchivist 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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