Has Qualcomm Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Qualcomm (NASDAQ: QCOM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Qualcomm.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

17.1%

Pass

 

1-year revenue growth > 12%

25.6%

Pass

Margins

Gross margin > 35%

63%

Pass

 

Net margin > 15%

32.3%

Pass

Balance sheet

Debt to equity < 50%

0.1%

Pass

 

Current ratio > 1.3

3.42

Pass

Opportunities

Return on equity > 15%

18.1%

Pass

Valuation

Normalized P/E < 20

25.67

Fail

Dividends

Current yield > 2%

1.5%

Fail

 

5-year dividend growth > 10%

12.3%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Qualcomm last year, the company has gained a point for the second year in a row. Revenue growth accelerated enough to pull up the five-year figure, even though the stock has gained less than 10% over the past year.

Qualcomm made the right call when it focused on high-end mobile chips, as it has a huge 48% revenue share of smartphone applications processors with a particular focus on popular high-end products. By contrast, PC processor giant Intel (NASDAQ: INTC  ) has only 0.2% share in the smartphone processor market, showing just how badly Intel has missed the boat on mobile. As a result, Qualcomm has passed Intel in terms of market capitalization, and its huge growth rates have helped it beat out Texas Instruments (NASDAQ: TXN  ) to become the No. 3 overall chip manufacturer. As more countries around the world shift to faster data networks, Qualcomm stands to benefit even more from this trend, both through greater processor sales and from licensing of the company's patents.

Recently, the big point of contention for Qualcomm has been whether it will get its processor chips into more smartphones and tablets. Qualcomm has been able to keep most of the smartphone market, but rival NVIDIA (NASDAQ: NVDA  ) has been successful in getting its Tegra line of chips into such popular tablets as the Nexus 7 and Surface RT. But recent reports suggest that the new Nexus 7 line may use a processor from Qualcomm's Snapdragon line rather than a Tegra chip, threatening NVIDIA's place in the tablet.

For Qualcomm to improve, it needs to use the move toward 4G networks to build up even bigger profits and start returning more of those earnings back to investors through dividends. If it keeps growing the way it has, though, Qualcomm could easily reach perfection by this time next year.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Has Qualcomm truly passed up Intel for good? Find out how Intel hopes to regain its leadership position by reading our premium research report on the company, in which our analyst runs through all of the key topics investors should understand about Intel's rivalry with Qualcomm. Better yet, you'll continue to receive updates for an entire year. Click here now to learn more.

Click here to add Qualcomm to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On February 13, 2013, at 1:51 AM, strelna wrote:

    Huge OM and FCFM makes it look cheap in some ways, but price in terms of PS 5.7 makes it look expensive in others. I am holding because I am not quite sure whether it is cheap or expensive! However, I am glad I have quite a big holding in this outstanding company from when it was cheap no argument.. Of course, it has the dreadful drawback that it has to keep re-inventing the product (pace INTC, AAPL etc. etc.) so it is a big holding not a massive one.

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