Since last July, shares of Qualcomm (Nasdaq:QCOM) have had a nice ride, jumping to $58 from $34.50.
Qualcomm is a top provider of semiconductor chips for mobile devices. And as seen with the growth in Apple’s (Nasdaq:AAPL) iPhone and iPad, as well as Google’s (Nasdaq:GOOG) Android mobile software, the industry is experiencing tremendous growth.
In fact, Qualcomm’s market value is now about $97 billion, and the company has been steadily increasing its dividend payout.
What may investors expect from the company going forward? Here’s a look at the pros and cons:
Pros
A technology leader. In 1989, Qualcomm introduced its cutting-edge digital mobile standard, known as CDMA. It was a huge breakthrough and a source of substantial growth for the company. There are now more than 10,000 patents on the CDMA technology.
But to improve its competitive position, Qualcomm has continued to invest heavily in research & development. Expenditures came to roughly $2.5 billion last year.
Acquisitions. With its large scale and distribution footprint, Qualcomm is in a good position for dealmaking. The most notable transaction was the $3.1 billion purchase of Atheros Communications. This will give Qualcomm a set of strong wireless, or Wi-Fi, technologies.
3G growth. Because of the costs of smartphones, market penetration rates have been higher in developed economies. But this is changing quickly. Lower-cost alternatives are getting traction in South America, India and China. And Qualcomm’s chips have been addressing these markets effectively.
Cons
Licensing model. While licenses are a source of high-margin revenue, the fact is that it is extremely tough to maintain them. Customers are constantly trying to find ways renegotiate or even eliminate the royalty payments. There may also be litigation, government lobbying or even appeals to standards organizations.
Flops. Because of its large cash flows, Qualcomm has been able to invest in other tech businesses outside of its semiconductor focus. Unfortunately, the results have been lackluster, such as seen with its FLO TV venture, which involved a $683 million investment in spectrum.
Fierce competition. Qualcomm faces rivals across the globe. They include biggies like Intel (Nasdaq:INTC), Broadcom (Nasdaq:BRCM) and Texas Instruments (NYSE:TXN). There are also a variety of fast-growing startups. Because of the tough environment, it’s often the case that there is lots of pressure on margins.
Verdict
Gartner expects smartphone shipments to top 1 billion in 2015, but this could prove to be a conservative estimate. No doubt, the smartphone industry represents a megatrend.
And of course, Qualcomm is likely to capitalize on this. What’s more, the company’s valuation is still fairly reasonable — even after the recent runup — coming to about 24 times earnings. For investors, the pros outweigh the cons on this stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
