From it beginnings as recently as 1985, San Diego-based, QUALCOMM, Inc. (NASDAQ: QCOM – $64.58) develops and markets integrated circuits through its CDMA Technologies Segment (64% of sales) providing semiconductors – including the popular battery-saving/high power Snapdragon processor – and system software solutions to wireless handset and infrastructure manufacturers. The company also licenses its various technologies (34% of sales) to major wireless original equipment manufacturers around the world, which provides close to 75% of earnings and sports a whopping 88% of operating margins. This lucrative part of QCOM’s business allows third parties portions of its intellectual property portfolio, which includes patent rights useful in the manufacture and sale of various wireless products, such as devices implementing CDMA2000, WCDMA, CDMA TDD, GSM/GPRS/EDGE and OFDMA standards. The rest of QCOM’s businesses provides data and positioning services for transportation applications, develops content management technologies, provides a platform for wireless application development via its Wireless & Internet division and makes strategic investments through its Strategic Initiatives unit.
Although industry forecasts vary, the company believes global smartphone production may total 1.7 billion by 2017, which would mark approximately 75% growth from levels expected this year. Considering only around a third of the 6.6 billion global smartphone connections utilize 3G technology, there is still room for QCOM to take advantage of the transition from 2G to 3G and onto 4G. Further, the company has a stranglehold on the LTE chipset market, with around 97% share, although Broadcom will begin to eat into this number as it increases production and Samsung may bring more of its chipset business in-house. QCOM recently announced plans to collaborate on a strategic R&D program with France’s Alcatel-Lucent to make new wireless transmitters for homes and offices. This may present an opportunity to become further involved in a future area of significant growth in the wireless sector.
The company has no long-term debt and is sitting on about $12 billion in cash that will help fund a 40% increase in the quarterly dividend, which now yields a respectable (especially for a tech stock) 2.2%, and a $5 billion share-repurchase plan. In summary, I expect QCOM to see strong chipset growth over the next year due to rapid roll out of 3G/4G LTE service by wireless carriers domestically and around the globe. For the third quarter ended in June, the company posted revenue of $6.24 billion and net income of $1.58 billion, or $0.90 a share, boosted by growing demand for smartphones in Asia. The company also raised its full year fiscal 2013 (ending in September) revenue outlook to a range of $24.3 billion-$25 billion and earnings are expected to come in at $4.54 per share, according to analysts’ consensus estimates. $4.96 is a good bet for fiscal 2014, whereby a forward PE of 13 makes for intriguing value. While an argument can be made to include QUALCOMM in the conservative portfolio given its strong finances and leading industry position, I believe that there is always a degree of risk within innovative technology sectors given rapidly changing advancements and consumer trends. In the near term, I don’t expect QCOM to outperform the broader market averages, but the long-term risk-reward scenario seems favorable and appropriate for an aggressive portfolio holding.
In the interest of full disclosure, I hold a position in QUALCOMM as well as in one of my managed accounts.