Why Netflix Soared and Qualcomm Sank

It was a generally dismal day for the Nasdaq (INDEX: ^IXIC  ) , with the index falling 0.76% while the S&P 500 slid a more pedestrian 0.35%. Macro events haven't helped the situation today, with the International Monetary Fund saying its sees an "alarmingly high" risk of a steeper slowdown next year. It currently projects 3.3% growth this year, with 3.6% growth in 2013. 

Yet for all the negativity surrounding the global growth situation, there were both winners and losers around technology. Let's check in to see what was driving tech stocks today. 

Netflix rallies
First up is Netflix  (Nasdaq: NFLX  ) , which soared more than 10% today. Another bullish note from the analyst community sent the company's shares north today, with Morgan Stanley upgrading Netflix to a buy. In what's becoming a repeated sentiment among analysts upgrading the stock, Morgan Stanley's Scott Devitt noted content costs might not be as crushing to Netflix's bottom line as he had previously expected. 

Along with an upgrade late last week from Citi and a bullish presentation from Whitney Tilson at the Value Investing Congress, Netflix is making a rebound in popularity on Wall Street. 

There are a lot of reasons to be concerned about Netflix, and repeated encroachments into the streaming space by not only Amazon.com (Nasdaq: AMZN  )  but now also a Verizon  (NYSE: VZ  )   and Coinstar  (Nasdaq: CSTR  )  tie-up makes streaming look like more of a commodity. However, at the end of the day, the most persuasive reason to own Netflix still looks to be how cheap the company has gotten relative to its large subscriber base. At the time of Whitney Tilson's presentation, Netflix was at an enterprise value (a measure that nets out cash) of only $99 per paid subscriber. That's a pretty rock-bottom valuation for a recurring revenue subscription business with solid customer loyalty. 

Since that time, Netflix's rallying shares have pushed that level closer to $130 per subscriber. Netflix is no slam-dunk, but with 29% of its shares sold short, rallies like the company has seen in the past week can build upon themselves. I wouldn't want to be in that 29% group right now. 

Qualcomm sinks
Qualcomm 
(Nasdaq: QCOM  ) saw its own shares sink just a hair shy of 2% today. The obvious catalyst was once again a downgrade; Avian Securities cut the company to neutral from a buy. 

Should investors be cashing out their chips on Qualcomm? I'm not so sure. Avian noted increased competition from companies such as MediaTekNVIDIA  (Nasdaq: NVDA  ) , and Broadcom  (Nasdaq: BRCM  ) across the processor space. Investors should be concerned about a company like MediaTek, as its racking up market share in the lower end of the smartphone processor space. In addition, Broadcom has scored victories with Samsung. That's never a welcome sign, as Samsung is quickly becoming the dominant player in the Android world. With NVIDIA, the researcher noted the company is gaining tablet traction. 

However, the problem is, while Qualcomm's mobile processors get a ton of attention for their success, they're still a relatively small (yet growing) part of the company's business. With Qualcomm, last quarter the company racked up $1.4 billion in profits from its licensing business, while its chips brought in $472 million in profits. 

More to the point, less than half of Qualcomm's revenue from its chip division probably came from smartphone processors. The rest was from shipping baseband chips to process wireless communications. Even if Qualcomm does lose some processor share -- currently it collects about 48% of smartphone processor revenues, according to researcher Strategy Analytics -- it will probably continue getting baseband wins, especially in LTE, where the company has established a clear leadership position. 

Long story short, the mobile processor market is getting more competitive, with MediaTek gobbling up low end share, but I think long-term-oriented Qualcomm investors are best ignoring a downgrade that cut its price target on the company by only $2 per share and should spend more time on high-end threats such as Intel's (Nasdaq: INTC  ) new smartphone chips, which are seeing surprisingly positive reviews. Big picture: It's Intel that is the largest threat to derailing Qualcomm's position atop the smartphone processor game. 

More investing advice
If you're looking for more advice on Qualcomm's new mobile rival, Motley Fool analyst Andrew Tonner has assembled a comprehensive report on Intel detailing the opportunity, the risks, and his bottom-line analysis on the company as it enters the mobile battlefield. Today, you can gain access to this report by clicking here now

Eric Bleeker owns shares of NVIDIA. The Motley Fool owns shares of Amazon.com, Intel, Netflix, and Qualcomm. Motley Fool newsletter services recommend Amazon.com, Intel, Netflix, and 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 (0) | Recommend This Article (5)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2048656, ~/Articles/ArticleHandler.aspx, 8/23/2014 3:51:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement