Why Qualcomm, Inc. Is Still a Long-Term Buy

Here's why the recent sell-off in Qualcomm may be overdone.

Jul 24, 2014 at 10:54PM

Following the release of its earnings results following yesterday's close, shares of wireless giant, Qualcomm (NASDAQ:QCOM) closed down 6.65% during Thursday's trading. Though the company's chip unit absolutely crushed it, as shipments came in well above the high-end of its guidance, its wireless patent licensing unit -- the company's biggest profit driver -- came in a bit soft.

That said, I'd like to make the case that Qualcomm, despite these near-term challenges, is still a good long-term bet. 

Qualcomm's a mobile one-stop shop
It's no secret that, at this point, Qualcomm is the world's most successful mobile-chip provider. However, there's been fierce competition in this space during the last several years. ARM (NASDAQ:ARMH) has made much of the key IP -- like graphics and processors -- that goes into these chips available for pennies per unit in royalty fees.

Though the market for mobile-applications processors has traditionally been difficult and somewhat commoditized, Qualcomm has managed to shine through. First off, the company has shown an ability to address a wide range of product tiers in a way that no other chip vendor has been able to -- even with ARM making it as easy as possible to build competitive products.

On top of that, Qualcomm has focused on integrating as much as possible onto a single chip and, when integration isn't appropriate, providing functionality as part of a complete platform. Qualcomm has worked hard to become the "one-stop shop" for mobile silicon.

Cashing in its chips
This strategy has paid off in spades, and this quarter was a real proof point: The company's chip sales were up 17% year over year to $4.957 billion, and operating profit was up a staggering 51%, to $1.116 billion. With mobile devices continuing to grow nicely, particularly in the low-end and mid-range, it really looks like Qualcomm has the right technology and cost structure to continue to grab the bull by the horns.

The QTL problem
Though Qualcomm's chip business is doing extremely well financially and competitively, it's not the biggest profit driver of its business -- its technology licensing business (known as QTL) is. As a quick reminder, Qualcomm has a bunch of fundamental patents on 3G and 4G wireless technologies that allows it to collect a roughly 3.1% royalty on the selling prices of 3G/4G LTE-capable devices.

Now, with phone-chip shipments on the rise, and with a broad transition worldwide from 2G feature phones to royalty-bearing 3G/4G LTE smartphones, it's a little weird that the company reported QTL sales down 5% year over year, and 15% sequentially. Apparently, Qualcomm thinks so, too.

In fact, Qualcomm made it clear that it believes that certain local Chinese handset vendors are underreporting device shipments by about 215 million units in aggregate for the year. These devices likely carry lower selling prices -- likely in the $100 range -- than the reported averages -- which are usually in the low $200 range -- but even if one assumes an average selling price of $100 for these devices and a 3.1% royalty rate, Qualcomm will be missing out on a full $667 million in royalty revenue for the year.


There's good news, though
The bad news, obviously, is that Qualcomm is missing out on all of this potential operating income. The good news, however, is that this isn't the first time that the company has dealt with these types of issues, and it's very likely that it will (eventually) get resolved. This may impact revenues/profits in the near term; but not only will these units probably come back, but Qualcomm may even be able to collect on these missing royalties at a future date.

Foolish bottom line
Qualcomm's business model is still fine and, over the long run, it's still very nicely exposed to the general growth in wireless through both chips and technology licensing. With approximately $33 billion in cash on the balance sheet, a very robust core business, and a proven track record of technological leadership and execution, this drop in the company's share price may prove to be a compelling entry point for investors who may have been waiting for a "dip" to buy.

This tech stock could be even more exciting than Qualcomm
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Ashraf Eassa owns shares of ARM Holdings. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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