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Should You Dump Intel to Buy Qualcomm?
Posted by: Ayush Singh (IP Logged)
Date: May 13, 2014 04:17PM
There's absolutely no doubt in my mind that Qualcomm (QCOM) is far more attractive an investment to many than its closest peer, Intel (INTC). Indeed, a look at the market capitalizations of these two names should tell you everything you need to know about how investors feel about the names on a relative basis:
Now, while Qualcomm is "worth" more on a market capitalization basis, Intel is just slightly cheaper on an EV/FCF basis (the Qualcomm's EV is quite a bit lower given its more robust net cash position relative to Intel):
Now, where it gets really interesting is on the free cash flow growth side of things, which is something that Qualcomm has been extremely good about while Intel, thanks to a declining PC market and continued failure to penetrate the mobile silicon market in any meaningful (and profitable) way, has not been:
Looking at GAAP-EPS (since Qualcomm does quite a bit of share based compensation that inflates the free cash flow number), Qualcomm's growth rate has still wildly outperformed Intel's:
A Fundamental View
The fundamental stories (which are what help you determine how those charts will move) are the following.
Has a wildly profitable wireless patent licensing business that carries close to 100% gross margin and grows nicely along with the growth of 3G/4G device sales
Has $30 billion or more in net cash in the bank (depending of course on buyback activity and this can fluctuate).
Commands over 50% of the smartphone applications processor market (yes, the denominator includes Apple (AAPL) and Samsung's (OTC:SSNLF) in-house efforts), and is now the leading vendor of tablet-oriented applications processors.
Has the world's leading modem technology.
Incremental silicon opportunity in handsets, set-top boxes, tablets and other areas where high performance SoCs are useful.
The apps processor share is likely to peak in 2014 as fierce competition comes online during late 2014/2015; the LTE modem story is similar.
Mobile silicon margins (this division is approximately 20% EBT margin) could erode in the near-term as R&D costs increase, wafer costs increase at new process nodes, and competition intensifies.
Growth in the licensing business could slow as smartphones with 3G or better start to reach saturation and as blended ASPs come down..
Now, Qualcomm has $30 billion in the bank and trades at 12.79x EV/EBITDA, so this isn't a wildly expensive stock by any stretch, and some of the bearish fears coming true wouldn't "pop" any kind of valuation bubble. The risk here is that Qualcomm's share price could stagnate and trade in a range after the strong upward move as a result of the mobile boom.
Now, for Intel:
Has extremely profitable PC and data-center group businesses, the latter of which continues to grow and is surrounded by a fairly wide and deep moat.
Has a manufacturing lead and in-house factories that allow it significant performance/watt and performance/savings advantages in operating segments for which the company has well-targeted designs.
Significant operating loss in mobile currently an approximately $3 billion or higher drag on operating results; revenue leverage (i.e. when the product pipeline begins to roll out and the revenue recognized) could erase loss and drive dramatic operating/net income growth.
PC market (Intel's largest business at approximately 62% of revenues) continues to decline, and will continue to weigh on the stock until this division bottoms.
Mobile division is currently losing about $3 billion and that is unlikely to get meaningfully better until 2015.
Server growth story has been more of a upward mix-shift story rather than a compelling unit volume growth one, reminiscient of the PC "boom" during 2010/2011 before crash in 2H 2012. Until unit growth accelerates, investors will remain skeptical that this division can hit the long-term growth targets Intel expects (about 15% multi-year CAGR).
There are concerns that the servicable portion of the mobile TAM by Intel is not large enough to justify such large investment.
Concern among the investment community that server share/margins will erode as a result of ARM-based server competition longer term.
It's pretty obvious that the list of "cons" for Intel is far larger than that of Qualcomm's. On one hand, this suggests that Qualcomm is probably closer to fairly valued as there are fewer factors leading to a "discount" to its intrinsic value than there are on Intel's side of things. Indeed, it almost seems as though Qualcomm is near the apex of its power and Intel is near a trough.
What I mean to say is this: Qualcomm is a good company and everybody knows it and is expecting good things. Intel is a company that some believe is good and others believe isn't, and baking in all of these unknowns the share price trades where it does today.
This means that for "fresh money," Qualcomm is likely to give you peace of mind and a sense of safety in owning the current semiconductor darling. Intel, on the other hand, is a diamond in the rough. If it can be dug out, polished and restored, it is very likely to be worth meaningfully more than it is today.
But there's risk. If the PC market is in terminal decline and the fears surrounding mobile/servers ultimately come to pass, then there's far more risk for Intel, as a chip company, than there is for Qualcomm which is an IP company that happens to run a powerful semiconductor business.
Would I sell Intel to buy Qualcomm today? No, I wouldn't, but if I still owned Qualcomm I wouldn't be in any rush to sell it.
If I owned Qualcomm (and not Intel), would I sell it to buy Intel? Probably not now, but the trade looks a lot more compelling just before Intel's November investor meeting, which is really the next meaningful catalyst that could drive Intel shares aside from an upside surprise in the quarterly reports up until then.
Stocks Discussed: INTC, QCOM,