This Stock's Long-Term Outlook Is Still Intact

Nihar 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) post-earnings decline was minor at best, and while there are reasons for investors to be a little concerned about the stock, the long-term story is intact. There were some things that warranted caution and trimming of positions. I am always for re-balancing positions as required, but the story for Qualcomm is far from over so do not throw out the baby with the bathwater. The company has decided to reward patient shareholders by upping its dividend. That helps mitigate some of the risk I see.

Growth stock concept's cracked facade

I am starting to think that the entire concept of a growth stock has become outmoded by the popularity of the concept of a growth stock. If you want to see what the post-growth world of a company looks like, then you need look no further than Cisco (NASDAQ: CSCO), but more on that later.

Growth stocks are priced far above earnings, because one day, the company will be so amazing that it will make all the pie in the sky dreams of investors come true, but this is not the case. Most growth stocks deserve their initial high valuation for the time that they meet and then exceed those levels, but as the growth story unfolds, the companies see even greater valuations on sentiment. Many people buy into the growth story and this puts it on such a high cliff that a slight breeze will send it tumbling.

The true growth stock would see explosive growth and then settle at a specific price until the underlying fundamentals catch up and then continue. As the company matures, it should maintain its price while growing earnings, which reduces the PE. An ideal growth story priced properly would not need to collapse as the growth story ended, because it will deliver on its growth expectations.

Qualcomm was never a growth stock

What is the difference between a growth stock and a mature company experiencing a resurgence of growth? For the market it is not much, but for the discerning mind, they are worlds apart. Qualcomm is massively profitable from an earnings and cash perspective. Its cash balance was built via operations, not investment capital and loans. I have had Qualcomm presented to me as a growth story very often, but it does not have a high PE. The only resemblance is the focus on the company's need to chase growth to justify its share price. I think the company can continue higher even with slowing growth.

Analyzing the decline, financial websites look for something to say about any decline. I suppose you can say guidance came in light, but still fantastically high. When I look at growth and profit growth, I do not just like to look at the number and see much higher it is than the previous number. I like to look at what the company will do with all that profit.

Qualcomm's story is not over, and it should not be judged like a growth stock that needs to chase growth to maintain its value. A lot of companies, like Samsung and Apple, are capable of making their own chips, however, Samsung has had some issues with the Exynos and opted for Snapdragon. Samsung has enough to do without having to worry about its processor. I am not sure I buy the story that everyone will want to make their own SoCs. Integrating LTE into the SoC also adds another layer of complexity that Qualcomm has better expertise dealing with than some phone maker that wants to use custom kit.

Old Growth and the transition

Cisco is a growth story from the 90s if such a time has not yet fallen into myth. It achieved $77 in 2000, but has been near $20 for most of its life after the bubble burst. The company has been strong in the last 10 years with fundamentals improving. It has a massive cash mound and has done a good job of diversifying its business. A lot of the articles focus on a return to the heady days of growth, but Cisco can never be a growth stock again. Drop the dream and focus on the reality. Cisco recently beat on revenue and saw the price jump up to $24, but has not really gone beyond what it accomplished on the first day.

VMware (NYSE: VMW) is an example of a company hitting a transition. The market is not going to wait for the company to catch up to its valuation, but just like it overreacted to the growth story, it will overreact to the transition. 2013 is a slow year for VMware specifically and the economy generally. The years afterward are likely to be strong. Within one year, companies might start testing SDN, which VMware got in early by buying Nicira.

Virtualization will only continue to grow and VMware is a leader in that. It is also a top player in the cloud. The news that the company was cutting jobs on the left and adding jobs on the right was good. That means the company is innovating while being conscientious about head count and projects that need trimming or closing.

Conclusion

Growth stocks are never handled right. As with most things, the scales tip too much in one direction whenever anything happens. This is not a question of maintaining. When VMware was at $105, I thought it was extremely overvalued and analyst projections for growth were absurd. Qualcomm is probably not going to see a decline as much as VMware, so it is a hold for people who own it, and the stock has mostly recovered any dips it saw due to shaky investors.

That might already be underway, but I think Qualcomm is definitely a nice investment now that it offers a dividend to take some of the pressure off growth. VMware is likely to do well over the next four years. Cisco has held $24 after a brief cooling off following its post-earnings run, and it could form a base to go higher with future earnings.

Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.


Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and VMware. The Motley Fool owns shares of Qualcomm and VMware. 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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