GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Should You Buy Qualcomm?

March 18, 2014 | About:
mitu77

mitu77

1 followers

Qualcomm (QCOM) surprised everyone when it declared its intent to enter the wearable gadgets market. It launched the first iteration of its smartwatch, called "Toq," in the fourth quarter. This is designed to serve as a second display to your smartphone. This could be a "smart" move if we look at the woes of Intel due to a shrinking PC market.

The year 2014 is already being touted as a breakthrough year for smartwatches and as already mentioned above; Qualcomm has declared that it will be launching its own smart watch called Toq in the fourth quarter of 2013. The latest research from Canalys projects that smartwatches "are set to explode by the end of 2014″ when vendors will ship more than 5 million units, a 900% increase from the number of units Canalys expects vendors to ship this year.

Investors were concerned that Qualcomm is currently too deeply entrenched in the mobile computing space, just like Intel was tied up with chips and processors for the PC market and was too late to diversify. Perhaps, Qualcomm may have many such "smart surprises" in store for the future that would please investors. But, before looking ahead, let's take a look at its current business which is doing well.

Performance in Recent Past

Qualcomm has a strong presence in the mobile computing space and was an early mover in the 4G LTE connectivity field. The company's recent quarterly performance has shown that it has improved considerably on revenue. It reported $6.62 billion, a gain of 10% year over year. The net income was $1.49 billion, with marginal decline by 2% year over year but 25% sequentially gain.

The Journey Ahead

Qualcomm's Snapdragon 800 quad core chipset supports 3G/4G LTE modem with ultra HD graphics. It also offers a better battery life and faster clock speeds of up to 2.2 GHz. This makes it an obvious choice for high-end smartphones. The company will supply Snapdragon 800 processors to Samsung for Galaxy S4 LTE-A phones also.

The company is strongly integrated into Apple's iPhone and iPad products as well as many Android-based devices, including the best-selling products from Samsung, Sony and HTC to name a few. It also has displaced Nvidia's Tegra line of chips in the second iteration of the Nexus 7 tablet from Google. It is evident that Qualcomm is positioned for growth even under different competitive and market scenarios.

Qualcomm's Snapdragon 800 quad core processors should also gain traction in emerging markets as deployment of 4G LTE gains momentum in China and India. In India, Qualcomm is looking to gain through its partnership with Bharti Airtel, the largest telecom operator in India. India has a huge telecom market with only 2% penetration of broadband service.

According to Gartner, the penetration of smartphones in emerging markets is still only 10% of the total population, and global smartphone demand is expected to grow at an annual compounded rate of 20% from 2012 to 2017. As for tablets, Gartner is expecting a huge annual increase of 67.9% in 2013 as tablets continue to gain market share at the expense of the declining PC market.

Competitors

In the wireless segment, Broadcom competes with Qualcomm. Almost 50% of Broadcom's revenue comes from this segment. But Broadcom has already lost a good number of low-cost smartphone sockets to Qualcomm. Instead of Broadcom's products, Qualcomm's connectivity chips were chosen for the Motorola Moto X and the Samsung Galaxy S IV Mini. In addition, Broadcom's main cash cow, 3G solutions, will be replaced in the next few years by 4G LTE solutions where Qualcomm already has a lead.

Even after disappointing earnings, most analysts still remain bullish on Broadcom, primarily because the stock is undervalued. However, one needs to ponder that in case the stock is really undervalued, why has negative sentiment persisted for so long?

Broadcom's negative market sentiment could increase further if Apple decides to use Qualcomm's connectivity chips for both the iPhone 5S and the 5C model that is aimed at emerging markets. Qualcomm's new RF360 Front End Solution chip could allow the iPhone to run on all 2G, 3G and 4G LTE networks and thereby allow Apple to save on costs which would become critical for the mid-range/low-end market segment.

Nvidia does offer some competition to Qualcomm in the mobile computing space through its Tegra processors, with the latest iteration being the Tegra 4. Nvidia has landed a spot at Chinese smartphone manufacturer Xiaomi, which has made its presence felt in China through sales of its iPhone beating handset.

Nvidia's Tegra 4 platform will also power Microsoft's Surface 2 tablets. This again is an important win technically, although the Surface tablets are yet to make any important dent in the tablet market. Windows RT, as we already know, was a failure. In the tablet space, there are rumors that Nvidia is coming up with its own Tegra 4 powered tablet later this year.

Conclusion

When it comes to mobile, Qualcomm is way ahead of its peers. The company commands a lion's share of the global baseband market and it is looking to extend its expertise further by branching into the next hot category — smartwatches. Investors looking for an ultimate play in mobile should consider Qualcomm for their portfolios.


Rating: 4.0/5 (1 vote)

Voters:

Comments

kfh227
Kfh227 premium member - 4 months ago

No one wants smartwatches.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide