It is shameful at how little I knew about Qualcomm (Nasdaq: QCOM). In seeking to rectify that I discovered a company with a very strong business, and fantastic technology to maintain its dominance. Qualcomm is a semiconductor company with a huge mobile presence, and I expect many phones will use Qualcomm chips in the coming years.
Socket in a Popular Phone
It is a good time to look into Qualcomm. It is in one more “to be successful” device, the S4 by Samsung. The phone might not be a success yet, but I do not think anybody is under any illusions. That series is nipping at the heels of the iPhone. Initially, the Snapdragon 600 processor was only going to be used in a few select markets, but recent news suggests that it will reach every market with LTE. The more Galaxy S4 phones Qualcomm is in the better it will be for the company, so this is welcome news.
Qualcomm is a high cash, low debt company experiencing great topline and bottom line growth. Cash sits at a cool $13B. It also has an adequate dividend yield of 1.50%, but that is nothing to write home about. The last quarter saw 28.56% YoY revenue growth, and 34.57% YoY EPS growth. Normally with numbers like that I would expect that a particularly bad quarter made the growth measure easy, but looking at the historical data it is clear that Qualcomm is just awesome. The historical data for EPS growth is less eye-popping, but still very good. This is a quality company.
Qualcomm is the Mobile Chip King
Contrast Qualcomm’s growth rates to ailing chip maker Intel (Nasdaq: INTC). Where Qualcomm has returned 63% in three years, Intel has returned –3.97%. Qualcomm has further to rise. I am usually a friend to the downtrodden companies, but Intel has to come out with more regarding its new strategy. It needs to convince me with its technology.
“The Great Enemy must be destroyed” – Intel
Intel is working hard to get into mobile. It missed the boat, and it accepts that. There is some hope that Intel will be able to carve out a nice market share. Citing dominance in PCs and servers is fallacious, because success in one does necessarily not lead to another. It will be dealing with entrenched competitors like Qualcomm that have strong product offerings. Plus, coming up from behind it really needs to do better than companies that have been there from the start in order to entice companies to switch. The other concern I have is that while the PC and potentially the server market shrinks, Intel does not just need a good market share in mobile. In order to stay flat it has to gain the ground in mobile that it is losing in its traditional market of desktops, notebooks, and maybe servers.
There is an expectation that servers will remain a solid market and even grow. While things look better there than the PC market, there are still threats. AMD is looking to fit its microservers with ARM-based chips. If microservers take a chunk out of the traditional server market and use ARM-based chips, Intel would see shrinking market share in the server market as well. This would be true whether microservers chip away at the traditional server market or account for most of the new growth. Intel can create its own processors for microservers with time and money, but its efforts are in mobile.
Intel has every chance of gaining significant market share in the mobile space, but there are already entrenched competitors with quality products. Spending more does not necessarily mean the company will produce a better technology, but money is almost always required for innovation. While Intel is spending money on R&D and production it might lose short-term ground as the PC market shrinks, while it builds a solid long-term strategy.
LTE Integration
I was going to follow up in a non-sequiter style and just talk about NVidia (Nasdaq: NVDA), but instead I want to talk about Qualcomm’s LTE integration and how peers like NVidia are only now offering something that partially competes. NVidia does have an offering for computing system-on-chips with Tegra, and Intel has its Atom platforms with all the additional applications like a specialized mobile version.
Qualcomm has jumped ahead and integrated an LTE modem onto its processing chip. The benefit of integration is better speed for internet uses and a better battery. There might also be other benefits. Since all the players in the industry are moving in that direction the disadvantages are minimal or nonexistent compared to the big advantages.
Intel and NVidia do not have an integrated processor yet, though NVidia is close with its Tegra 4i. That is the Tegra design with an integrated modem, but it won’t be ready to ship until late 2013. Qualcomm’s is ready now. It is rumored that the Snapdragon S4 Pro from the previous line of Snapdragon chips, which also includes an integrated modem, will be in Google’s Nexus 7 tablet. Galaxy S4 will be using Snapdragon 600, which as no integrated modem but is from the most recent line of chips. Qualcomm gets one year of being the only company out there with a processor integrated with an LTE modem. NVidia’s share price has not moved much in the last few years, and being behind Qualcomm will not help matters.
Conclusion
Consider Qualcomm for its substantial potential due to excellent products and a strong market presence, but it does have a higher PE, 17+, than its peers to reward it. It is still a fantastic company, and the valuation is not so high that any mid to long-term investor would not be comfortable taking a position. You should probably avoid Intel until you see it making substantive progress. Intel might be doing everything right, but it is tough to know that until the results can be seen. NVidia I like because of moves like Project Shield, but it has fallen behind in some areas putting a damper on the future. If NVidia can show the potential for strong growth in the future the share price should appreciate.
Additional Riffing:
Despite Qualcomm’s higher multiples, I think it can still move higher. It really is the creator of some fantastic chips for phones. Qualcomm seems to be all over the place, but even I did not notice until I looked closer. There really is not much more to say, because I went over the technical aspects. The integration is a cooler step than it might appear on the surface. It speeds things up, uses less power, etc.
Intel has a great chance of doing well in mobile, but it is a hard road. It also will not be a short one. The question is how will Intel do well in mobile without being ARM. It wants to set itself apart. It also owns a lot of manufacturing capacity that it needs to use. Companies like Apple or Samsung that decide to make their own chips in-house are not what they want. I guess if they use Intel cores like how Tegra uses ARM cores it would make use their manufacturing capacity.
NVidia is doing what it can for the future. The Tegra is an important part of what they do, but they are branching off of that. Project Shield looks cool, and I can’t wait till we get more information regarding that new product.
The post Qualcomm Leaping Over Competitors appeared first on The Market Archive.