Qualcomm (QCOM) is a little less mobile today, with the stock off by 4% in early trading. That brings the company’s year-to-date return down to about 7%.
The recent weakness comes from last night’s earnings report. In fiscal Q4, the company posted revenues of $6.48 billion, up 33 percent year-over-year, while net income climbed 18% YOY to $1.50 billion, or $1.05 per share on an adjusted basis. The Wall Street forecast called for revenues of $6.24 billion and earnings of $1.08 per share.
But it was the outlook that gave Wall Street concerns. For the next quarter, Qualcomm expects revenues to range from $6.3 billion to $6.9 billion, below the Street’s expectations of $6.99 billion.
Will the slowing continue, or might there be an opportunity to get Qualcomm stock at an attractive valuation? To see, here’s a look at the pros and cons:
Mobile: Founded in the late 1980s, QCOM became an industry pioneer when it developed a platform called CDMA that allowed for better cellular communications. Since then, the company has continued to push innovative technologies. For the most part, QCOM generates revenues by licensing its intellectual property to companies like Apple (AAPL), Samsung (SSNLF) and LG Displays (LPL). The company also has a thriving business with devices that use Google’s (GOOG) Android platform. Just with its CDMA technology alone, QCOM has a portfolio of more than 10,000 patents.
Secular Growth: The mobile industry should continue to grow in the long term. The number of global mobile connections is forecast to jump from 6.6 billion in 2012 to 8.3 billion by 2016, according to a report from Wireless Intelligence. The main reason is that the industry is moving away from voice calls to data-based applications, such as video, social networking, gaming and cloud computing. Another key is the rollout of next-generation networks across the world. Collectively, this means that demand should remain strong for QCOM technologies.
Financials: QCOM is a cash machine. For the past year, the company has generated operating cash flows of $8.78 billion, up 46% YOY, and representing 35% of overall revenues. As a result, QCOM has ample resources to keep up its competitive position with aggressive R&D expenditures. But the company also has enough for shareholder payouts as well. In fiscal 2013, it has returned $6.7 billion in dividends and repurchases of Qualcomm stock. Currently, the yield is about 2%, and has increased for 11 consecutive years.
Revenue Mix: With the smartphone market hitting saturation levels in the U.S. and Europe, QCOM has been moving more aggressively into emerging markets. While there is lots of room for growth, pricing remains an issue — after all, emerging markets generally have lower income levels. So the Q4 results, which showed pressure on the bottom line, may be an early sign of the potential margin pressures.
Competition: Even though QCOM has a great technology, competition has remained intense. Some of the rivals include biggies like Intel (INTC), Broadcom (BRCM) and Texas Instruments (TXN). There are also a variety of fast-growing startups and a spate of operators that focus on the low-end market, including MediaTek and Spreadtrum (SPRD). QCOM has also been lagging with its efforts with tablets — the company recently lost out on a deal to NVIDIA (NVDA) to supply chips for Microsoft’s (MSFT) Surface 2.
Licensing model: Licensing is a nice source of high-margin revenues, but far from guaranteed. Keep in mind that licensees often try to find approaches to renegotiate or terminate agreements, and QCOM must constantly deal with intensive litigation. For example, the company had to take a 10 cent per share charge because of a patent case with ParkerVision (PRKR).
The Qualcomm earnings report was uncharacteristically cautious. All in all, it looks like the company is facing real pressures from competitors as well as downward pricing in emerging markets.
But those challenges are inevitable, and QCOM is still nicely positioned — in terms of its technology, ecosystem and global brand — to benefit from the long-term growth in mobile. There should be a nice boost late next year when China rolls out 4G LTE. And the attractive valuation (with a forward PE ratio of 14) and decent dividend yield don’t hurt.
So should you buy Qualcomm stock? Yes — if you’re looking to play the mobile trend at a fair valuation, the pros certainly outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.