In a fascinating example of new tech depending on old tech, the most up-to-date consumer devices on the planet depend on one of the most veteran wireless chipmakers on the planet. And the marriage is working out best for the geezer. That would be Qualcomm (QCOM), one of my letter’s top tech picks this spring, a company that’s been a leader of the wireless phone and data revolution for more than two decades and has the scars to prove it. 

For most of the 1990s, Qualcomm was constantly recommended and bought by value investors who saw in the company’s patented technology a revolutionary way to organize cellular data. But shares went nowhere as the company was locked in a fierce and costly patent fight with Nokia (NOK), which absolutely ruled the industry back then. 

In the spring of 1999, in one of the most exciting moments of the tech bubble, the Finnish wireless giant agreed to license Qualcomm’s technology, and shares went on to spurt from the split-adjusted $3 area to around $80. It was the most stunning explosion of value of that amazing period in market history, as ordinary investors made tens of millions of dollars in trading profits; the biggest challenge was holding onto the shares.

The stock peaked the first week of 2000, and would go on to fall by 90% in fits and starts before finding a footing and stabilizing. And as you can see in the chart above, it has most recently stabilized in the $35 to $45 area — still a titan in wireless technology and the San Diego technology scene, but a shadow of its formerly towering presence on the market stage.

Qualcomm’s revenue mainly comes from two sources: The first is its monopoly on Code Division Multiple Access, or CDMA — a technology that allows a mobile phone to access a wireless network. Its lock on the patents allows it to force telecom carriers like Verizon and Sprint to pay 3% to 5% per wireless device sold. Its rival technology, Time Division Multiple Access, or TDMA, is much less widely used. 

The difference has been described this way: Imagine you are in a room with 100 people who all have something to say. That’s a wireless network. How is each conversation heard clearly? CDMA assigns a different code, or language, to each conversation; TDMA assigns a different time slot for each conversation. There are other protocols, but these are the most prevalent.

On top of this stable source of sales, QCOM s the leading producer of semiconductors used in CDMA phones and PDAs. Its sales rise in tandem with the exponential rise of cellular device usage — not just in the United States, but increasingly in Latin America and Asia as well. 

Leveraging its leadership position, QCOM has always maintained a very strong balance sheet with no debt and a cash hoard equal to 25% of sales, and a gross margin a bit higher than 70%. Much of its revenue goes into research and development, and this year its effort has paid off with a hot new platform called “Snapdragon” that is finding wide adoption due to its speed and lower use of energy; the latter allows it to help phone developers create devices that go longer between charges.

This is a multiyear growth story, and QCOM management believes the shares are so undervalued that they recently launched a $3 billion buyback, which is a big plus. The stock is going for around $42 now, but my research suggests that fair value over the rest of this year is more like $50. 

The company lifted its fiscal second-quarter outlook three weeks ago due to an expectation of higher licensing revenues and chip sales. It hit a bump in the road in Japan and Europe sales late last year, but that trouble appears to be in the rear-view mirror. QCOM reports earnings on April 21 after the bell; expect a beat.

For more ideas like this, check out my Trader’s Advantage newsletter. And full disclosure: As mentioned earlier, I own shares of QCOM in this newsletter.

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