Can Qualcomm Remain on Top?

With the explosive growth of both smartphones and tablets, the mobile chipset market is well positioned to drive significant growth to those companies that are best prepared. Qualcomm (NASDAQ: QCOM  ) has been the beneficiary of its inclusion in some of the year's most popular devices, including several from Samsung and Apple's iPhone 5 . The company is not resting, however, as competition from NVIDIA (NASDAQ: NVDA  ) , Broadcom (NASDAQ: BRCM  ) , and Intel (NASDAQ: INTC  ) is fierce. Qualcomm recently announced the release of several lower-end chipsets targeted at emerging markets, specifically China, as well as a new foray into displays. The outlook is very positive for the company and for shareholders, making the stock a buy at current levels.

Where have we been?
This year has been a strong one for Qualcomm, based largely on its dominance in the 4G LTE space. The chip is featured in the several top Google (NASDAQ: GOOGL  ) Android phones (including the latest Motorola Razr phones),  in Nokia's Lumia Windows phone line, and in Apple's first 4G LTE iPhone. A recent report by Strategy Analytics puts Qualcomm's market share at 48.1% of all application processors, which comes within an industry that registered 69% year-over-year growth. These facts combined to help the company post very strong numbers at its early November earnings release. The company reported an increase in net income of 20% and an increase in revenue of 18%. Adjusted earnings for the quarter came in at $0.89 per share relative to the $0.82 per share expected by the analyst consensus.

Where are we going?
In order to continue on its solid growth path, Qualcomm is undertaking two important projects that should leave investors pleased: the introduction of chips targeted at emerging markets, and an expansion of its business into the display market . The push into emerging markets is critical because while sales growth in the smartphone market is growing at 46% globally, within emerging markets that number jumps all the way to 63%. In China alone, the third quarter saw the sale of 47 million smartphones, which represents year-over-year growth of 117 %.

The two new chips sets, dubbed MSM8226 and MSM8626 , are built on a 28 nanometer process and include quad core design and enhanced graphic capabilities. Of perhaps even greater importance, both of the chips will integrate baseband support for all of China's 3G networks , specifically China Mobile's proprietary TD-SCDMA infrastructure. This should position Qualcomm to address increased competition from both MediaTek and Broadcom, each of which have taken market share from the company at the low-end of the Android market.

The importance of price has proven of critical importance in emerging markets, as demonstrated by the fact that "other" brands of smartphones represent the largest growth component of that market by a significant margin. These are mostly low-end smartphones built on the Android platform. Despite China Mobile's industry-leading 700-million-strong subscriber base, the company's challenging 3G network architecture has led to only 11% of users being converted. Qualcomm is also launching a dual-core chip that will compatible with both TD-SCDMA and TD-LTE .

Intel, which finally managed to capture a 0.2% market share in the first half of 2012, is struggling alongside NVIDIA to become more relevant in the space. NVIDIA's Tegra business is also targeting the low end of the Chinese Android market , and has become a more significant player in tablets, specifically the Google Nexus 7. Intel, which is expected to finally break into the 4G LTE market  in the early part of 2013, has done solid business supplying chips for Motorola's non-U.S. devices.

The other recent announcement that could prove to be a solid source of growth for Qualcomm is the company's $120 million cash infusion into Sharp. During an interview with The Wall Street Journal, the company's chief marketing officer, Anand Chandrasekher, detailed some of the company's intentions :

Our unit, Pixtronix, has had a joint relationship with Sharp from a development standpoint and we are just intensifying this further. Sharp has had a history of great display technologies and they still have a great portfolio. This agreement is a deepening of that relationship.

While this size of investment barely moves the needle for a company with a market capitalization north of $108 billion, it is illustrative of the company's continued push to expand into new business lines.

What does it mean?
From an investment perspective, each of these developments is very positive for the Qualcomm's growth outlook. While the push into displays is more emblematic than immediately a trade catalyst, the chip releases are vital. Even with the current size of the Chinese wireless subscriber base, the untapped growth is significant. Adding to the appeal is the usually short product cycle of smartphones; people tend to upgrade at contract cycles. China Mobile, in particular, is a monumental opportunity for Qualcomm because such a small percentage of the company's customers have made the move to 3G. With 89% still running on 2G networks, the new chips could unleash a mass upgrade, even among the cost-conscious who have stayed near the cheapest end of the spectrum.

The release of the 3G/4G chip means that Qualcomm is not abandoning the high end of the market either. The recent news that China Mobile will begin carrying the Nokia Lumia 920T, which runs on a Qualcomm chip, also demonstrates the full market coverage that Qualcomm is getting in China. Emerging markets will drive growth for chip makers for the foreseeable future.

Given Qualcomm's strong base among high-end smartphone makers headed into the holidays and its solid positioning for growth well into the future, the company has aligned itself to remain the dominant player in the semiconductor market. As such, the stock is a strong buy for your core portfolio.

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