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Following Intel's (NASDAQ: INTC ) lackluster earnings report, the company's shares took a pretty substantial hit, trading down about $2 per share from the pre-earnings peak of $27.12. In the meantime, mobile chip (and wireless patent giant) Qualcomm (NASDAQ: QCOM ) powered to new 52-week highs. More importantly, though, Qualcomm's market capitalization is now squarely ahead of Intel's, making it the world's most valuable semiconductor company.
Gotta love patents
Roughly two-thirds of Qualcomm's profits actually come from its wireless technology licensing business. This is a fabulously profitable business segment, as the company collects royalties on just about every 3G/4G device sold. Now, since the transition to 3G/4G is happening at a rather brisk pace (but it's not anywhere near completed), Qualcomm should see some very nice top and bottom-line growth in its QTL business segment.
The remaining one-third of the company's profit base (but the vast majority of its revenue base) comes from chips. Think Snapdragon SoCs, Gobi modems, Atheros Wi-Fi, and various other wireless components. Qualcomm's business model works because it has a nearly inexhaustible source of income from its patent licensing business, meaning that the company can very aggressively invest in new areas of growth.
Intel, not so much
Intel's operating profit comes from two divisions: the first is the PC client group, which consists of CPUs/SoCs/chipsets for notebooks, desktops, and high-end tablets, and the second is the data-center group, which consists of server CPU/chipset sales and other various data-center-oriented products. These are good businesses and, combined, they generate far more operating income than Qualcomm's businesses generate, but they're not as "safe."
While Intel is taking some pretty serious share in PCs (as evidenced by AMD's dismal first-quarter guidance), the TAM is currently shrinkng. This means that, at best, Intel can try to keep it flat for a few quarters, but until the trend in the TAM reverses, this is a business that negatively impacts Intel's valuation. In datacenter, while Intel is unlikely to lose meaningful share to the various ARM players, there is always the risk of share loss, which again keeps a lid on the multiple that investors are likely willing to pay.
Qualcomm now the big dog
Thanks to Qualcomm's pristine balance sheet with roughly $30 billion in net cash, very reliable free cash flow, and a solid multi-year path for growth, it has now become the world's most valuable semiconductor company, even with a revenue base that's just half of Intel's. How long will this pecking order remain?
That depends on how much traction Intel is able to gain in mobile, and how well Qualcomm is able to defend its chip share/ASPs. Ultimately, though, Qualcomm's patent stream is likely to support the company well enough to always command a premium multiple to Intel, meaning that if Intel is to push on ahead, it will need to do so with significant EPS growth.
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