Investors caught in the fight for mobile device supremacy between Apple (NASDAQ: AAPL ) and Samsung can fall prey to the ups and downs of product cycles. But the smart investors understand that Qualcomm (NASDAQ: QCOM ) will win either way, regardless of who comes out on top. And the company is beginning to reward investors for their intelligence.
It pays to be smart
Last week, Qualcomm announced an immediate 40% hike in its quarterly dividend. The company also plans to buy back $5 billion worth of stock, which replaces the prior $4 billion buyback program. Qualcomm said that the dividend will increase from $0.25 to $0.35 per share of common stock and will be effective for quarterly dividends payable after March 27, 2013. This means that the annualized dividend payout is now up to $1.40 per share of common stock. But not everyone jumped for joy.
Following the news, Qualcomm was removed from Goldman Sachs' "conviction list." But it was for other reasons. Analyst Simona Jankowski said that the removal was on the premise that Qualcomm's market share is likely to have peaked, while citing increased competition from the likes of Broadcom (NASDAQ: BRCM ) . But she did maintain her buy rating and an $80 price target.
It seems Qualcomm's operating leverage and competitive threats continue to be cited in bear arguments. This is despite the fact that the company still dominates the mobile market, while setting new standards for the transition between device generations. For instance, Qualcomm recently announced its game-changing chip, the RF360 Front End Solution, which eliminates radio frequency band fragmentation, the biggest headache for device manufacturers.
The chip combined all of the long-term evolution, or LTE, platforms into one family, while improving the radio frequency performance, which now supports all seven cellular modes. This means that an OEMS like Apple doesn't have to manufacture three versions of its iPhone 5 just to support multiple carrier frequencies. This also means that consumers can move from one carrier to the next without having to buy a new phone. Is there a smarter chip on the market that is able to solve the key issues of platform, network, and ultimately consumer choice?
Qualcomm's pretty shrewd
When the company reported its first-quarter earnings results, it wasn't a surprise that management guided revenue roughly 10% higher, while Broadcom and (to some extent) NVIDIA (NASDAQ: NVDA ) went the conservative route with guidance. One of the main reasons for Qualcomm's confidence had to do with the new chip.
However, there was a point when investors were worried that Qualcomm was funneling too much of its profits back into research and development. Likewise, operating expenses have been climbing for some time. But management has been working on the next generation of chips, or ways to squeeze rivals out of business. During that same span, names such as Intel have fallen off and Texas Instruments have been unable to keep up.
Consequently, Texas Instruments exited the mobile market altogether. While NVIDIA's Tegra 4i chip is a marvel in its own right, "smart" platform vendors like Apple can't pass on the RF360, especially since it can offer Apple more leverage and potentially billions in savings. Everything today is about margin. And device manufacturers will have to answer for why they passed on Qualcomm.
Growing where others can't
Qualcomm's strong position with Apple and Samsung is an advantage not shared by many rivals. While, Broadcom can make the same claim, management didn't seem too confident going into this year that it can sustain its recent growth levels. Even though Broadcom's management guided for 8.2% growth in Q1 revenue, it still suggests 5% sequential decline.
Although Broadcom might have guided under what it can likely deliver, I wouldn't look beyond management's words in this case. The company might be able to steal share, but it will be hard given Qualcomm's already 52% market share in baseband chips. And with Qualcomm guiding higher, I don't see where Broadcom has any room.
So with all due respect to Jankowski, what she's seeing and what managements of both companies see are not in alignment. Even though NVIDIA recently boasted about taking market share at any cost, it won't come at Qualcomm's expense.
What of the stock?
I do agree with Jankowski on her $80 price target. These shares have been undervalued for some time and should be acquired by investors who believe in the long-term growth prospects of mobile. While concerns about operating leverage and competitive threats will still come up, Qualcomm has been able to offset these fears with better performance and game-changing innovation. I don't expect this to change.
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