Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Shorting Qualcomm Seems Like a Bad Idea

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Seeking Alpha contributor Michael Blair offers up an interesting set of reasons to sell shares of Qualcomm (NASDAQ: QCOM  ) short. Indeed, Mr. Blair's arguments are the following:

  • Average selling prices for handsets are set to decline.
  • Growth rates for smartphones/tablets are declining fairly rapidly.
  • Chip competitors are mounting an aggressive assault.

While these factors are all undeniably true, it's still difficult to comfortably go short on Qualcomm as the company's fundamentals -- despite these headwinds -- are set to continue to improve. Shorting a stock with improving fundamentals is generally tantamount to financial suicide.

Average selling prices decline, but volume rises
Qualcomm's business is unique in that it gets to double dip in the smartphone market. Many of Qualcomm's competitors profit from -- or hope to profit from -- sales of chips in handsets. Qualcomm not only profits as a component vendor, but also from the license of wireless patents. Indeed, about two-thirds of Qualcomm's earnings before taxes comes from royalties collected on all 3G/4G LTE devices. That means that every time Samsung sells a smartphone, Qualcomm immediately receives a meaningful percentage of that device's selling price.

The argument that Blair makes is that the average selling prices of smartphones are declining, and that's a negative for Qualcomm. While it is true that the average royalty per device will decline by virtue of lower average selling prices, this ASP dilution is largely due to the explosive growth of low-end devices that now support 3G/4G and now become royalty-bearing. Yes, high-end device growth is much slower than low-end device growth, but the high end is still growing.

Growth rates are declining rapidly? So what?
All secular growth trends eventually slow, and the smartphone boom that began in 2007 will eventually be subject to slowing growth. This, of course, means that Qualcomm's technology licensing growth will slow, and its components business will see muted growth as well. However, Qualcomm trades at just 20 times trailing 12-month GAAP earnings, and even a modest 10% growth of EPS and revenue over the next five years is enough to suggest a fair value of $79 today -- a modest bump from today's roughly $77 trading price. This is not an expensive, hyper-bubbly growth stock -- it really is growth at a reasonable price and it can withstand slowing growth in its core end markets without a sizable correction.

The competition question
There is no doubt that a bear case can be made, predicated on meaningful market-share losses in the handset/tablet space. That being said, there are no competitors in the chip space today that offer as complete and as fully featured a set of solutions for the handset market as Qualcomm. MediaTek has seen high growth in the low end of the market, principally due to aggressive pricing and an ability to stitch together off-the-shelf IP quickly, but this is not a truly durable competitive advantage.

Qualcomm, on the other hand, has been very aggressive in the development of its own CPU, GPU, and modem IP and is currently world-class on every IP block. Longer-term, only the companies willing and able to spend the most to win in this space will survive. This means Qualcomm and Intel (NASDAQ: INTC  ) , particularly as the latter seems to be the only company that is investing just as heavily as Qualcomm and has the modem/RF chops to be a long-term threat, particularly if Intel can deliver as promised on its XMM 7260 LTE-Advanced modem. The other players seem to be fast followers at best with respect to modem technology. 

However, the bigger point here is that Qualcomm doesn't actually derive the majority of its earnings from components -- it does so from licensing/royalties. As long as there is no significant risk to the royalty stream, and as long as Qualcomm can maintain a strong position in the smartphone-chip duopoly, it doesn't really face as large a competitive risk to its bottom line as one might initially suspect.

Foolish bottom line
In a bull market, shorting a company with improving fundamentals is often very hazardous to one's financial health. While there are reasons to be less bullish or neutral on Qualcomm, it is probably better to save the outright short sales for companies with shaky fundamentals or untrustworthy management teams. There are plenty of these companies out there, so trying to make a few bucks shorting a high-quality name like Qualcomm seems to be a fairly poor risk/reward proposition. 

Want a better way to profit from the changing trends in mobile?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Read/Post Comments (0) | Recommend This Article (1)

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: 2872423, ~/Articles/ArticleHandler.aspx, 9/1/2015 10:29:55 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...

Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

Today's Market

updated Moments ago Sponsored by:
DOW 16,152.15 -375.88 -2.27%
S&P 500 1,930.64 -41.54 -2.11%
NASD 4,687.69 -88.82 -1.86%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 10:14 AM
QCOM $55.48 Down -1.10 -1.94%
Qualcomm CAPS Rating: ****
INTC $27.83 Down -0.71 -2.49%
Intel CAPS Rating: ****