Why Qualcomm Is Still a Solid Bet

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Oct 29, 2014
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Despite delivering strong results and beating Wall Street estimates, Qualcomm (QCOM, Financial) took a solid pounding. The chip maker's shares fell more than 6% after the company released results, driven by fears that its business in China is in serious trouble after news emerged that the government might impose sanctions on Qualcomm due to its monopoly position.

This might create a serious dent in Qualcomm's prospects going forward, as the company has been counting on the Chinese smartphone market to power its growth. But, will it be right to ditch Qualcomm on the basis of China fears? Apparently not. The company is seeing rapid growth across a wide range of applications, and it should be able to come out of its slump going forward.

Targeting wearables

The chipmaker is accelerating its evolution from the present generation Mirasol display technology to the licensing of the next generation, with a keen focus on wearable devices. However, it plans to continue to make and sell the current generation Mirasol displays to provide support for certain existing customer requirements. This is an example of Qualcomm's diversification, and the wearable market should open up a huge opportunity for it going forward.

Qualcomm is doing the right thing by diversifying its business into new areas, and this should help it mitigate weakness in any one market going forward.

Key acquisitions to enhance expertise

Qualcomm is also enhancing its current portfolio with some key technologies through acquisitions. First, it acquired Wilocity, a leader in the development of 60-GHZ chipsets based on the IEEE, 802.11ad standard, also referred as WiGig. It has been working closely to monitor the impact of this technology on some crucial new high-bandwidth used cases.

Qualcomm has also upgraded its RF team with the acquisition of Black Sand, which also widened its RF 360 roadmap. And finally, it acquired digital still camera technology from CSR, and enhanced its differentiation in the key area of image processing.

New products will be catalysts

On the product front, Qualcomm launched its first device based on the Snapdragon 805, and also introduced the fourth generation multimode 3G/4G modem. The company has also launched the fourth generation Qualcomm Gobi 9x35, which is the first 3G LTE modem to be commercially used in smartphones.

The company's Qualcomm CDMA Technologies business witnessed robust design traction, and it expects the same to continue going forward. Qualcomm’s success so far in China has been based on chipsets launched last year, and it is on track to commercialize its new low cost architecture with the Snapdragon 410.

Qualcomm is also pursuing growth in devices with its Wi-Fi and RF360 solutions. Both product lines have seen solid growth, with overall Wi-Fi unit volumes growing more than 40% this fiscal year due to a higher attach rate in mobile. Going forward, the continued roll-out and growth of multimode 3G LTE will open up a huge opportunity for the company. According to the GSA, 300 operators have implemented LTE and over 200 more have promised to deploy LTE going forward. Additionally, more than 55 operators are planning to deploy LTE Advanced services, including carrier aggregation.

Qualcomm is well positioned to attack this opportunity with its LTE portfolio that includes chipsets across multiple product tiers. The company is on track to launch the Snapdragon 810 with Category 6 for smartphones in the back end of the year. So far, more than 2,000 multimode 3G LTE devices have either been launched or are in design, based on its chipset solutions. Qualcomm has commercialized LTE Broadcast in Korea, and has demonstrated in the U.S., Europe and Australia. There’s also an LTE Direct trial in Germany with the help of Deutsche Telekom.

The automobile pipeline of Qualcomm is also strong. The company is adding OEMs and design wins at a robust pace. Qualcomm is leveraging its LTE leadership in the automobile segment with the quick transition from 3G to multimode LTE, with customers such as General Motors (GM) launching OnStar LTE driven by Qualcomm's solutions.

End-market demand is robust

Qualcomm is seeing robust demand for its 3G and multimode 3G/4G chipsets, primarily driven by strength in the emerging markets. The company posted record shipments of 225 million MSM chipsets, well ahead of expectations, and the trend could continue in the future.

Qualcomm is focusing on certain crucial objectives to sustain its momentum. First, it aims on competing effectively across all tiers in the LTE rollout in China, coupled with promoting the modem and AP roadmap. Second, Qualcomm has initiated plans to focus its investments on opportunities adopting its core technologies, and technologies that deal with growing data consumption and Internet of Things adoption. Third, Qualcomm has set targets in order to realize superior operating leverage from its scale. Finally, it is focused on materially increasing its return of capital.

Valuation and conclusion

Qualcomm's diversified product portfolio places it in a solid position to profit from several quarters. Additionally, the company has strong fundamentals. It has a trailing P/E ratio of 19 and a forward P/E ratio of 13. This means that its earnings are expected to grow. Also, the PEG ratio of 0.95, below 1, is healthy. Finally, Qualcomm's bottom line is expected to increase at a CAGR 15% for the next 5 years, and this is another reason why investors should consider the stock for their portfolio.