Today's Buy Opportunity: Qualcomm

Welcome to the first installment of "11 O'Clock Stocks." Check back to Fool.com at 11 a.m. ET, and we'll be finding a new great stock idea every weekday for the next 50 days. Not only that, but to prove how much we believe in these stocks, we'll be investing $50,000 across our picks. To hear more about the series, click here to see a video from Motley Fool co-founder Tom Gardner.

It doesn't take an investing genius to see that smartphones are everywhere, and there are opportunities to find long-term winners in the field. However, we're also in the midst of a platform war between Google's (Nasdaq: GOOG) Android and Apple's (Nasdaq: AAPL) iPhone. As the battle intensifies, there's a tremendous amount of uncertainty about which companies will dominate the field five years from now. However, the one certainty investors can bank on is that small, mobile, connected device demand will continue surging across that time.

And there's one company that is perfectly positioned to profit immensely from that certainty. That's my "11 O'Clock" stock pick: Qualcomm (Nasdaq: QCOM).

Qualcomm Fast Facts

Source: Capital IQ, a division of Standard & Poor's.
TTM is trailing 12 months. Cash total includes long-term investments.

Qualcomm: A history of innovation
Take a swing by Qualcomm's San Diego headquarters and you'll immediately be greeted with an unusual sight. The company literally has a wall of patents.

Photo courtesy of Barry Dodge. Used with permission under Creative Commons 2.0.

Qualcomm's proud of its history of innovation and the vast patent portfolio that resulted. The wall's a reminder of that. However, the wall is also a statement of something else:

Qualcomm has patented the technology behind every 3G data network in the world .

If you want to use a phone that can connect to a modern data network, Qualcomm is profiting.

How Qualcomm did it
To understand how Qualcomm gained such vast influence over the telecom industry, you need to take a look at the company's past. Qualcomm was founded by a team of engineering geniuses who had a radical plan to reshape the wireless industry. In the late 1980s cellular networks were extended beyond capacity. Qualcomm believed they had the solution to fix the problem, a technology known as Code Division Multiple Access (CDMA), which was much more efficient than any existing or future technologies.  

However, the wireless industry is standards-driven, and by the time Qualcomm began heavily pushing for their solution, most of the world had already coalesced around a different technology. While Qualcomm's solution worked best on paper, there were a number of powerful detractors who said the technology would never work in real life and loudly opposed CDMA's use. The company was essentially alone, to both patent and promote its technology.

Despite vast challenges, Qualcomm managed to persuade a limited number of wireless companies to go against the industry and adopt its standard. To get support, Qualcomm had to build the handsets for its technology, build the network equipment, and train its partners how to work with this new, complex technology. In short, it was a small start-up that had to do everything required to get a massive network off the ground. The odds against Qualcomm getting traction were staggering, but the company eventually succeeded in widespread adoption of its technology.

The patent king
Qualcomm later got out of capital-intensive fields like making cell phones and network equipment. However, the experience of learning how to best optimize its technology across wireless networks proved invaluable. The company used this experience to build out a massive patent portfolio for its CDMA technology.  

With most patent companies there's uncertainty around whether their patents will hold up or how much money the company can generate from the patents. Not with Qualcomm. In the wireless world, the only two certainties are death and paying Qualcomm. While each of its license contracts differs, Qualcomm has said it typically receives royalties that range between 4%-5% of the wholesale selling price on phones utilizing its technology. Many top of the line smartphones have wholesale prices up to $600. That means Qualcomm could be collecting up to $30 with little to no costs incurred on each of those smartphones flying off the shelves.

To make matters even more compelling, Qualcomm used the knowledge it gained from implementing CDMA to start selling chipsets based on the technology. The company's closely held trade secrets assure that it's extremely competitive in the space. Thanks to that expertise, Qualcomm is one of the largest chip makers in the world.

The buy opportunity
Qualcomm's share price struggled across the last year because of concerns over declining phone selling prices and fear over a transition from 3G networks (the current standard) to newer 4G networks where Qualcomm's patent portfolio is a bit weaker and hasn't withstood the same legal challenges. These concerns are overblown for a couple of reasons.

First, the lower selling prices means Qualcomm collects less royalty revenue per phone. However, the volume gains from emerging countries should more than compensate for any selling price declines in developed countries like the U.S. Many emerging markets are just launching 3G networks, and growth rates should be fantastic in coming years.

Also, the growth of Google's Android has been a huge boon for Qualcomm. Not only have Android sales helped prop selling prices back up, but Qualcomm has scored a number of high-profile wins on Android phones in its chipset business. As Android excels, Qualcomm's own future becomes brighter.

Secondly, Verizon (NYSE: VZ) and AT&T (NYSE: T) have begun transitioning to 4G wireless networks. Qualcomm still has strong patents behind this technology, stating that its royalty revenue is expected to be 3.25% on the standard that Verizon and AT&T are moving toward. While this royalty rate is less than its 3G, phones will still have to connect to 3G networks over the foreseeable future as 4G networks will mainly focus on urban build-outs. That means Qualcomm's royalty revenues shouldn't take much of a hit from this technology transition.

Also, AT&T's and T-Mobile's recent decisions to upgrade existing 3G networks demonstrate that carriers remain dedicated to maintaining strong 3G networks, even after the next generation of technology rolls out. Reports of 3G's death have been greatly exaggerated.

Bottom line and risks
I have to be honest, when co-Founder Tom Gardner asked me for a stock pick, Qualcomm was at what I considered to be a fire-sale price, about 20% below where the stock's trading today. I still think the stock's a great buy, but it's moved closer to the $50-per-share fair value at which I'd assess the company. So if you want to buy, don't overpay if Qualcomm's price keeps climbing.

In the long run, the greatest threat to the company is legal challenges to its patent portfolio, added competition in its chipset business, and the threat that its technology isn't utilized in future wireless technologies. However, with its position in the driver's seat for both the current and next generation of technology, Qualcomm's an extremely safe bet with some fantastic growth opportunities. If you're looking to get back into the market or build out your portfolio, Qualcomm's a top stock pick to get started.

Come back to Fool.com tomorrow for another great stock pick. "Eleven O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of Qualcomm. To see an FAQ on "Eleven O'Clock Stock," click here.