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Should You Buy, Sell, or Hold This Mobile-Chip Stock?

With a trillion-dollar revolution now beginning that will last for years, an investor can't help wondering about the best way to capitalize on the coming wave of mobility.

Component suppliers are among the more promising possibilities, even if they're somewhat hidden. The harder question to tackle is which suppliers to pick. Qualcomm (Nasdaq: QCOM  ) is one of the most important chip and technology suppliers in the mobile space. Should you buy, sell, or hold Qualcomm?


  • Intellectual property: Qualcomm is one of the largest holders of 3G technology patents. Virtually every 3G device made contributes to the company's royalty revenue, since its broad portfolio of intellectual property is unavoidable for 3G devices. We are now seeing wireless technologies transition from 3G to 4G, and Qualcomm also has patents on 4G standards LTE and WiMAX. It has less of a presence there, though, so 4G royalty rates tend to be lower than what it can garner from 3G.

    However, emerging markets still have very low 3G penetration, so even after the U.S. transitions to 4G, there is still opportunity in growing areas such as China and India, among others. For example, according to figures released earlier this year by the National Bureau of Statistics of China, the world's most populous nation had 859 million mobile phone users last year (64% of the population), an increase of 112 million from the prior year. Only 47 million of those were 3G mobile users, representing 3G penetration of 3.5% of the 1.34 billion population as of the end of last year.
  • All that and a bag of chips: The bulk of Qualcomm's revenue still comes from selling chips and other integrated circuits, comprising 65% of sales in the just-finished fiscal year, with the remaining 35% from licensing. Qualcomm has been scoring handfuls of design wins, in part because of its integrated baseband approach. Its standalone baseband chip kicked Intel (Nasdaq: INTC  ) -owned Infineon out of the Apple (Nasdaq: AAPL  ) iPhone 4S this year. Apple uses its own custom ARM Holdings (Nasdaq: ARMH  ) -based chips instead of Qualcomm's ARM-based Snapdragons.

    Rival NVIDIA (Nasdaq: NVDA  ) is also looking to integrate basebands into its own ARM-based Tegra processors, incorporating its $367 million purchase of Icera. NVIDIA's codenamed "Grey" member of the Tegra family is set to include an integrated baseband next year. The arms race between these two chipmakers continues to escalate, as NVIDIA's Tegra 3 is the first quad-core mobile processor, with Qualcomm's quad-core Snapdragon due out next year. Either way, Qualcomm is one of the clear leaders in mobile chips.


  • Intellectual property: Relying heavily on intellectual property can also be a negative. Lawsuits are a reality for any company that monetizes patents, and legal costs can mount quickly and become distracting for management. By specializing in IP, the company needs to stay ahead of the curve in technology. R&D expenses rose 22% last year, and that trend will continue for the foreseeable future as standards progress. If Qualcomm fails to develop IP in relevant technological standards, it may eventually kiss its royalty revenue and R&D dollars goodbye.
  • Margins: While Qualcomm currently enjoys a healthy operating margin -- 33% last quarter, which is higher than NVIDIA's 19 -- there are a few looming factors that could cause Qualcomm's margins to take a precipitous hit. The aforementioned lower 4G royalty rates are one possibility. The company also sees average selling prices falling slightly in the coming year, which reduces its royalty revenue.
  • It expects ASPs between $197 and $209, lower than the range of $203 to $209 in fiscal 2011 and the range of $204 to $210 seen in the fourth quarter. Qualcomm has little say in retail pricing, which is left to OEMs and carriers. Competition from the likes of NVIDIA, Intel, Broadcom (Nasdaq: BRCM  ) , and Texas Instruments (NYSE: TXN  ) , among others, in the market for various mobile component chips can also hurt pricing power, further exerting downward pressure on margins.


  • Valuation: Trading at 20.2 times earnings, shares aren't cheap. They're more expensive than NVIDIA's 13.5 multiple, but they've also put up better growth over the past five years. Qualcomm has grown its top and bottom lines by 14.7% and 13.3%, respectively, over that time period, compared with NVIDIA's 8.3% and negative 4.8%.

The verdict
Qualcomm is a buy. It has entrenched itself in a crucial role within the mobile supply chain, and that's not changing anytime soon. It will need to stay abreast of changing technological trends, but it has a long track record of doing just that.

The company is one of the best picks among mobile component suppliers, and I'll take it two steps further. Not only have I recently sold a bullish put spread on the shares in my personal portfolio (which has numerous component plays), but I will also go ahead and give it an "outperform" CAPScall today. Qualcomm really is the king of the mobile future.

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Fool contributor Evan Niu has sold bullish put spreads on Qualcomm and NVIDIA. He owns shares of ARM Holdings and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Qualcomm, Intel, Texas Instruments, and Apple and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Apple, and NVIDIA, creating bull call spread positions in Intel and Apple, and writing puts in NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2011, at 10:48 PM, russfischer1013 wrote:

    I hope Evan isn't on the payroll.

    This is pretty close to the most indecipherable piece that I've read recently.

    QCOM is totally dependent on TSMC for every piece of silicon they ship.

    When Intel ships their 22 nm process devices in the 1st qtr, QCOM and NVDA will begin the death process.TSMC struggles with 40nm and can only get lucky making a few parts at 28nm.

    Intel bought Infineon simply to have a legal hassle-free baseband solution to integrate into the upcoming Atom based SoC products.

    Intel is a triple for 2012, QCOM will end 2012 lower, take it to the bank.

  • Report this Comment On December 30, 2011, at 9:49 AM, Borisbmx wrote:

    this article isnt original. its like a condensation of several bullish articles written from various sources throughout the year.

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