Qualcomm: Enabling smartphones

By Stephen Leeb, editor The Complete Investor

We are adding Qualcomm (NASDAQ: QCOM) to our growth portfolio due to its technology franchise.

Its business centers around patents regarding wireless technology, with many related to the CDMA mobile communication platform. In fact, over 25 years of research and development have translated into a portfolio of approximately 11,600 U.S. and 54,100 international patents and patent applications.

Qualcomm has become a technology supplier to myriad companies, providing either the semiconductor chips or licensing its technology for a fee, with the company’s business model being to provide wireless companies big and small with the know-how needed to bring their innovations to the market.

We think they’ve succeeded in that quest, and are reaping the benefits of decades of hard work. The CDMA platform is front and center of the shift to third generation or 3G wireless communications, a platform supporting faster speeds for larger packets of data.

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Qualcomm’s advanced technology has been a major reason that the proliferation of smartphones, including Research in Motion’s Blackberry and Apple’s iPhone, has been possible.

The trend shows no letting up, as consumers across the globe are buying these multi-use devices in strides. 3G device shipments are expected grow by more than 20% in 2010, even in the face of a global economy still reeling from the recession.

As this shift continues, some technology research houses estimate that phones and other mobile devices will actually overtake PCs as the most common web browsing device as soon as 2013. The growing consumer appetite hastens the need for fast and reliable chips, and Qualcomm has answered the call (pardon the pun).

The San-Diego, CA-based company has great exposure to the growing 3G market, while also possessing major inroads to 4G/LTE technologies as well. In the company’s fiscal 2009, the company collected roughly $10.4 billion in sales, with about 60 percent coming from chips sales.

Over a third of the company’s revenues came from technology licensing fees. As the patent portfolio provides a moat around the franchise, its international customer base gives business additional stability.

While over a third of their sales are tagged as South Korean, this is misleading as the headquarters of Qualcomm’s corporate client (Samsung in the South Korean chip powerhouse) is not necessarily where the end users (mobile phone buyers) are domiciled.

The company does, however, have tremendous potential in China where next-generation CDMA offshoots like WCDMA and TD-SCDMA technology are gaining traction.

Shares of Qualcomm sold off after the company’s recent quarterly report (for its fiscal 2010 first quarter) in which the company noted the weaker environment in Europe and Japan. While we are somewhat concerned about the near-term outlook, we see the ensuing dip as a buying opportunity for this insulated franchise.

The stock is now trading at less than 18 times 2010 estimated earnings, and with long-term earnings growth of close to 20%, the PEG is very attractive at just under 1.

To go further, the company has a strong balance sheet boasting zero debt and over $7 in cash per share. Ex this out and the valuation looks even cheaper. We add Qualcomm to our Growth Portfolio today.

Learn more about this financial newsletter at Stephen Leeb's The Complete Investor.