Qualcomm Is Down but Certainly Not Out

CDMA pioneer Qualcomm (Nasdaq: QCOM  ) recently posted strong, second-quarter numbers that comfortably exceeded analyst expectations. The company's revenue went up by almost 28% from the prior-year period, hitting $4.9 billion. Net income also rose by an astounding 123% up to $2.2 billion from $999 million last year.

However, despite the great show, Wall Street gave Qualcomm a thumbs-down as the company's shares took a hit. Let's find out why.

A few bumps on the road
The market reacted to Qualcomm's third-quarter, earnings-per-share forecast coming in below analyst estimates. The company said that operating expenses are slated to shoot up further because of a projected supply shortfall for its 28-nanometer chips. These chips are supposed to cater to the next generation phones supporting 4G LTE technology, one of which may be Apple's (Nasdaq: AAPL  ) forthcoming iPhone 5. This news also has led to speculation that the shortage of Qualcomm's chips could delay the release of the iPhone 5.

With companies such as Samsung, Apple, and HTC accounting for almost 30% of Qualcomm's chip sales, the supply shortage possibly could affect the production of a lot of other upcoming cellphones as well.

Reasons for optimism
On the bright side, however, the company seems to be addressing the supply problem by working closely with its Taiwan-based manufacturing partner for 28-nanometer chip technology, and tying up with new ones as it scouts for alternate suppliers. Research firm Strategy Analytics has predicted that worldwide LTE phone shipments this year would reach about 67 million units. Small wonder then that Qualcomm is ramping up the 28-nanometer chip production process.

Remember, the good part is that the problems Qualcomm is facing are not because of lack of demand, but rather too much demand. Emerging markets such as China are experiencing a growing appetite for smartphones. The country is currently the world's largest mobile phone market, with its number of users close to an incredible 1 billion. According to IHS, smartphone sales in China are expected to top 120 million units this year, which translates to an amazing 85% jump from last year's 65 million units. This should come as good news for all mobile chip makers, including Qualcomm.

And that's not all, as the company has successfully diversified into other areas as well. According to Strategy Analytics, Qualcomm holds the position of the world's leading supplier of next-generation 4G baseband modems with a 43% market share in chip sales for the third quarter.

The company also has plans to make a significant impact on the Wi-Fi space, as it announced the first-of-its-kind 802.11ac chip that combines the functionality of the latest Wi-Fi standard along with Bluetooth and FM network connectivity. The effort has been spearheaded by Atheros, a company Qualcomm acquired last year for $3.1 billion. This would really give Broadcom (Nasdaq: BRCM  ) , a market leader in Wi-Fi enabled chips, a run for its money.

A Foolish wrap-up
Qualcomm is not alone in facing a supply shortage of chips -- peer Nvidia (Nasdaq: NVDA  ) also has cautioned investors about a similar problem. However, in the long run, I believe that the company would be able to iron out its supply-side issues to meet the booming demand for its 28-nanometer LTE-based chips. I feel Qualcomm is a good bet for the long run.

Qualcomm might be just one good way to ride the smartphone and tablet wave. But there are more opportunities waiting for your attention. I suggest you read a unique free report titled "3 Hidden Winners of the iPhone, iPad, and Android Revolution." With smartphones and tablets selling like crazy, there are lots of companies that can make you profit. Get it while its still there, and don't worry -- it's free.

Add Qualcomm to your watchlist.

Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Qualcomm. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and NVIDIA. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended writing puts on NVIDIA. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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