Smartphone chipmaker Qualcomm Inc. (QCOM, Financial) has found its magic again. That is, the robust sales growth that reminds us of the old good days.
On Wednesday afternoon, the company reported fourth-quarter figures that exceed Wall Street's expectations by a large margin.
Adjusted earnings came in at $1.45 per share on revenue of $6.5 billion.
Both figures were well above the $1.17 a share on sales of $5.94 billion expected by analysts. On a year-over-year basis, Qualcomm's earnings jumped 86%, while sales rose 35%. And things will continue to look good in the current quarter, with earnings per share expected to come in at $1.67 on $7.8 billion in revenue.
The news was music to the ears of investors, who sent Qualcomm's shares sharply higher in extended trading.
Qualcomm's strong financial performance marks a big turnaround from three years ago, when sluggish sales and shrinking margins raised the prospect of a breakup or sale.
For years, Qualcomm was in the right business at the right time—wireless technologies—riding one mobile communications trend after another. Its pioneering products became the industry standard, turning the company into a "toll" collector for almost every smartphone manufactured worldwide.
That could explain the company's hefty operating margins over the 1995 to 2015 period.
Then, Qualcomm's magic began to fade away as revenue growth stumbled and profit margins were squeezed on the back of competition from MediaTek (TPE:2454, Financial) and Samsung (XKRX:005930, Financial) - which have begun to use their own chips for new smartphones. Additionally, Qualcomm has had difficulty collecting royalties in China, its largest market, after having been fined close to $1 billion by the Chinese government.
Then there were massive layoffs adding salt to the wound, depriving the company of the talent it needs to compete effectively in a rapidly changing market environment.
And there's an even more serious problem. Qualcomm's failure to come up with the "next big thing" to leave the competition in the dust and set up new tollbooths for collecting royalties.
But all these challenges seem to be successfully addressed. The company is beginning to collect licensing fees from Chinese smartphone makers and ride the resurgence in smartphone demand worldwide.
The credit for this turnaround should go to the company's big bet on 5G technologies.
"Our fiscal fourth-quarter results demonstrate that our investments in 5G are coming to fruition and showing benefits in our licensing and product businesses," CEO Steve Mollenkopf said. "We concluded the year with exceptional fourth-quarter results and are well-positioned for growth in 2021 and beyond. As the pace of disruption in wireless technology accelerates, we will continue to drive growth and scale across our RF front-end, Automotive, and IoT adjacencies."
That's good news for Qualcomm's shareholders. However, they should be cautious of adding more shares to their positions as the company's market valuation runs ahead of its intrinsic value, according to GuruFocus estimates.
Disclosure: I own shares of Qualcomm.
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