Qualcomm (QCOM +0.61%) did it again. In the Nov. 22 trading session, Qualcomm -- formerly the second-most-valuable chip company by market capitalization -- took the throne from rival Intel (INTC +2.55%). While Qualcomm has, at times, briefly held this crown, it's tough to ignore how rapidly one company rose as the other fell.
While it's difficult to know if it was actually occurring, it appeared to this Fool that investors were fleeing Intel and piling into Qualcomm. What are the key drivers that would explain such a shift?
Understanding both businesses
Intel is a pure-play chip company with a software and services hobby. Its lifeblood is the design, manufacture, and sale of microprocessors into a wide swath of end markets, but principally PCs and servers. The company's chip-design prowess is augmented by its superior, in-house chip manufacturing capabilities. While chip plants are capital-intensive, and while the research and development required to build the chips is substantial (in excess of $2 billion a year), it comes with the advantages of control. If you're Intel, it also comes with a lead in manufacturing over the contract foundries.
Qualcomm, on the other hand, is a company that could best be described as a wireless solutions company. It does anything and everything wireless, which includes developing key technologies and standards, building great applications processors, modems, and even dabbling with low-end network processors.
The company makes a healthy operating profit from the sale of chips into more than half of the world's smartphones and tablets. But a full two-thirds of its operating income comes from the licensing of its wireless technology and patents -- it gets a cut from just about every cellular device sold.
So, while Qualcomm is probably the best large-cap peer to Intel on the market, these businesses aren't 100% comparable. If Qualcomm were just a mobile chip company, then it would likely be a fraction of the size that it is today, since its chip division generated about $3.2 billion in earnings before tax, while the company as a whole made $9.5 billion in earnings before tax.
Qualcomm the largest by market cap, but not by income
Qualcomm generated $7.2 billion in operating income during its fiscal year 2013. Intel, on the other hand, is a bit tricky since the blended operating income number is somewhat obscured by the extremely large operating losses that it's eating in its mobile efforts. In 2013, Intel's PC group did $11.6 billion in operating income, its datacenter group did $5.3 billion, and software and services was break-even. Tallied up, this looks pretty good at $16.9 billion in operating income.
Unfortunately, the investments that Intel is making in its mobile efforts took a cool $2.5 billion out of the operating income line, and the company's "all other" -- which includes foundry efforts, NAND, and other miscellaneous expenses -- take a big chunk out of Intel's results and bring operating income down to about $13 billion for the year. This is still appreciably higher than what Qualcomm posted for 2013 and higher than what it is likely to post for 2014. So, what's going on?
It's all in the sentiment...and the balance sheet
Right now, Intel's PC client group is stagnant. Its mobile division is posting huge losses. But it's all supported by a growing datacenter business. The path to growth on a blended basis seems to be on hold until 2015, and even then it depends on how the PC market does. Qualcomm, on the other hand, is in the driver's seat with respect to both mobile chips and wireless patents. This is a hotter growth area than PCs, so it commands a multiple commensurate with a "hot" growth business.
Also of note is that while Qualcomm's market capitalization is higher than Intel's -- $123 billion versus $117 billion, respectively -- Qualcomm has about $30 billion in net cash on the books, while Intel has a mere $7 billion in net cash. This suggests that the market values Intel's business more than it values Qualcomm's business. But cash on the books can't be ignored, especially since Qualcomm is getting much more aggressive on dividends/buybacks. That brings Qualcomm right on up to market capitalization dominance.
Foolish bottom line
This data point is interesting to look at. The optimist could conclude that if Intel can show that it can grow its top and bottom lines meaningfully, Intel's share price could go substantially higher on the back of the gobs of operating income it generates. The pessimist may conclude that Qualcomm may be overvalued on that same basis. And, finally, some may not view this as particularly consequential to future price movements.
