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Thursday April 26, 2012
Qualcomm: Short-sighted opportunity
by Geoffrey Seiler, editor BullMarket.com  Mobile chipmaker Qualcomm (QCOM) recently delivered Street-beating results, but the stock fell on what was perceived as "disappointing" guidance. Qualcomm, we note, follows the playbook perfected by Apple and common throughout the tech sector of guiding conservatively only to beat estimates. As a result, the market's reaction to earnings highlights the short-term memory problems of many investors. As such, we're going to step up and add the stock to the Recommended List with a "Buy" rating and $78 price target. Qualcomm's management did point to a real, if temporary, problem in the form of a supply chain bottleneck that it said could result in it losing some sales of its top-of-the line chips to competitors. It expects to have the problem in hand later in the year. Qualcomm operates as a "fab-less" chipmaker, meaning it doesn't operate any of its own factories. It relies instead on contract manufacturers. Turning to the results, Qualcomm reported a profit of $2.23 billion, $1.28 per share, for the quarter that ended March 25th, which was more than double the $999 million, or 59 cents per share, it reported for the year-earlier period Qualcomm's adjusted net income excluding one-time and non-cash items was $1.01 per share, which topped the consensus analyst estimate of 95 cents. Revenue surged by 28% to $4.94 billion, up from $3.87 billion last year and slightly ahead of the $4.93 billion consensus. Qualcomm shipped approximately 152 million CDMA-based MSM chipsets in Q2, up 29% year over year. The results topped its guidance of a mid-point of 150 million, but it guided for Q3 shipments of 144 million to 152 million. The company's MSM 8960 Snapdragon processor is widely used in a number of high-end smartphones. CFO William Keitel said shipments of 3G/4G devices, particularly smartphones, grew significantly in the March quarter, driving record total reported device sales of $51.7 billion, up 25% sequentially and 29% year over year. Qualcomm is a company that we have long admired, even if we haven't added it to the Recommended List. Its ownership of the key patents behind the CDMA codec make its licensing division a cash machine, while its chips are widely used in 3G/4G smartphones and tablets throughout the world. Qualcomm has a number of things going for it over the long term. The latest version of the iPhone, the 4S, is using a Qualcomm baseband processor that handles both CDMA and GSM, which was not used in past models. Its new LTE chip is also in the new iPad and will undoubtedly be in the next iPhone. If the iPhone 5 launches in the fall, as most analysts expect, it should be a huge driver for Qualcomm. A number of new devices based on the Android operating system are launching using the Snapdragon processor. Chips made by Qualcomm or using its technology are in an estimated 80% of the Android devices on the market. It also has 100% of the Windows Phone 7 device and as Nokia converts from its proprietary OS over to Windows it should translate into a bump for Qualcomm given its large market footprint. We agree with most of the analyst commentary we've seen that the selloff on the company's supply chain issues is overdone; Qualcomm can be expected to move quickly to alleviate any supply shortages, which should set the company up for a big fiscal 2013. Plus, if there is going to be a problem, this is one of the better ones to have. As such, we think investors should use the recent drop and any further weakness to pick up shares in this quality high-tech stock. Excluding its net cash and total investments, it trades for under 13x fiscal 2012 estimates (ending September) and under 11.5x the fiscal 2013 consensus of $4.17. We view this as a first buy, and if there is a spring/summer swoon, we'll be looking to buy more shares in order to dollar cost average into the position. Learn more about this financial newsletter at Geoffrey Seiler's BullMarket.com. Related articles: 
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