3 Reasons Qualcomm, Inc.'s Stock Could Rise

Qualcomm (NASDAQ: QCOM  ) is the world's leading vendor of semiconductor chips aimed at the smartphone market. In addition, it owns a war chest of wireless patents that allow it to collect royalty checks from the sale of just about every smartphone sold. Though the stock sold off following its most recent earnings report, here are three reasons Qualcomm's shares could be poised to rise over the long run. 

Continued mobile chip dominance

While some investors believe that mobile chips are a brutal, razor-thin profit margin business, Qualcomm would likely beg to differ. In its most recent quarter, Qualcomm's chip division (referred to as QCT) did $4.96 billion in sales and generated $1.12 billion in operating income. That's a 23% operating margin. 

More interestingly, though, is that there appears to be a long runway ahead of the company in the mobile chip business. Not only does Qualcomm command over 50% of smartphone applications processor revenue share according to Strategy Analytics, but it is making a very concentrated push into grabbing additional smartphone chip content.

To illustrate, management indicated on its most recent earnings call that unit shipments of its Wi-Fi connectivity chips -- typically the stronghold of competitor Broadcom -- are on track to grow 40% for the current fiscal year. CEO Steve Mollenkopf also remarked, "we now have over 100 devices launched or in design incorporating RF360 [Qualcomm's RF front end solution]." 

Finally, with the mobile chip market showing continued signs of consolidation, the remaining suppliers are poised to capture more revenue share, perhaps even at improved margins as competitive pressures ease. 

Qualcomm's licensing business could get a lot better

Qualcomm's technology licensing business -- known as QTL -- is by far the most profitable business that the company runs today. The bull case seems to be that generally speaking, as 2G feature-phones are replaced by 3G/4G smartphones, Qualcomm sees incremental royalty-bearing units (since Qualcomm is entitled to collect royalty checks from the sale of 3G and 4G devices).

Qualcomm indicated that a problem it has seen recently with its technology licensing business, however, is that a number of local Chinese smartphone vendors have been under-reporting their 3G/4G device shipments. Worse yet, Qualcomm claims that some vendors are outright selling devices without a license.

This dynamic, according to Qualcomm, affected its QTL business in its most recent quarter, and the weakness is expected to continue into the current quarter.

It's not all doom and gloom, though. According to RBC Capital Markets' Mark Sue, Qualcomm has dealt with these kinds of situations before with Korean, Japanese, and European vendors. Qualcomm, too, seems confident that these issues will eventually get resolved.

Once they do, the company could see QTL revenues and profits begin to reaccelerate.

Supplier diversification could help chip margins

While Qualcomm does enjoy reasonably good operating margins in its chip business, there is likely to be a further opportunity to increase margins over the long run. In particular, it looks as though Qualcomm continues to diversify its chip manufacturing partners both at the low end by adding on Semiconductor Manufacturing International, and at the high end -- according to Digitimes -- partnering with both Samsung and Taiwan Semiconductor for future 14-nanometer/16-nanometer nodes.

Since Qualcomm, according to Strategy Analytics, commands over 50% of the mobile applications processor industry revenue, the company is likely to be able to drive down chip wafer prices from its suppliers as they compete for Qualcomm's business.

With potentially lower wafer prices, coupled with continued mobile chip design superiority, the operating margin of Qualcomm's chip division may be set to rise from current low-20% levels in the long run.

Foolish bottom line

Qualcomm is a company that is well exposed to the continued growth in mobile devices from both a patent perpspective as well as a chip perspective. Though the most recent quarter proved a bump in the road for Qualcomm's business and share price, and though these concerns are legitimate, the company is still well positioned to grow both its business and its stock price over time.

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