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Qualcomm: The Best Play on Accelerating Shift to 4G Smartphones

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This company enjoys a lock on proprietary technology for increasingly popular mobile devices, providing investors with growth amid market uncertainty.

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Tepid economic growth in the US and recession in debt-plagued Europe have hurt semiconductor demand, wounding technology giants such as Intel (NASDAQ:INTC). However, one company has emerged as a consistent winner because it's wired like no other into the global passion for mobile devices: Qualcomm (NASDAQ:QCOM).

This month, the company has been on a roll. On November 15, Qualcomm Chief Executive Paul Jacobs stated in his presentation at the company's annual investor day that management expects a compound annual growth rate of at least 10% for its revenue and earnings per share (EPS) over the next five years.

This sanguine assessment followed a stellar earnings report on November 7, when Qualcomm reported a 20% surge in earnings for its fourth quarter of fiscal 2012, based on robust sales of chipsets used in wireless devices, along with gains in its licensing business.

For the quarter ending September 30, Qualcomm reported earnings of $1.27 billion, or $0.73 in EPS, compared to earnings of $1.06 billion, or $0.62 in EPS, for the same year-ago period. Revenue rose 18% to $4.87 billion. Analysts were expecting EPS of $0.82 on revenue of $4.7 billion.

For the full fiscal year, revenue was $19.1 billion, up 28% year over year, and earnings were $6.1 billion, up 43%. EPS was $3.51, up 39%.

Qualcomm's fourth-quarter performance surpassed analysts' expectations, at a time when many technology companies have been feeling the ill effects of a slump in PC sales and curtailment of corporate spending.

Qualcomm is the seventh-largest technology company in the US, boasting a market capitalization of more than $100 billion and $25.6 billion in cash on its balance sheet. The company is comprised of two segments: Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL).

QCT designs and sells chipsets that are integral to a host of popular electronic devices, including laptops, tablets, and smartphones. The QTL division owns a large portfolio of patents for mobile telecommunications. The company's lock on this valuable intellectual property means that every time a manufacturer sells a handset that allows for high-speed data connections, Qualcomm reaps a royalty on the sale-regardless of the brand of device.

Smartest Play on Smartphones

Qualcomm is the best play on the accelerating migration of consumers from third-generation (3G) to fourth-generation (4G) smartphones.

Rivals will find it hard to dislodge Qualcomm's built-in advantages. The company's chips hold slots in phones from Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Nokia (NYSE:NOK), Samsung (PINK:SSNLF), and Microsoft (NASDAQ:MSFT).

In particular, the company's powerful SnapDragon baseband chip is used by more than 50 manufacturers, as well as on smartphones that run Google's Android operating system.

Apple's new wildly popular iPhone5 uses a 4G LTE chip from Qualcomm, making the chipmaker a big winner in the latest iteration of the device.

Also boosting Qualcomm's fourth-quarter performance was the company's ability to dramatically increase its production of tiny 28-nanometer chips. This smaller chip size offers greater power efficiency and design flexibility, subsequently enhancing average selling prices and Qualcomm's gross margins.

Qualcomm clearly dominates its niche in smartphones, a sweet spot that will pay off for years to come. The smartphone segment now accounts for nearly a quarter of global technology sales, a figure that's set to double over the next three years.

Analysts estimate that by 2015, one billion smartphones will be in use around the world, up substantially from last year's 472 million. Shipments of cheaper smartphones should increase to 400 million during the next three years.

Research firm IDC reported in October that the worldwide mobile phone market grew 2.4% year over year in the third quarter of 2012, driven by sales from Qualcomm clients Apple, Samsung, and Nokia. Vendors shipped a total of 444.5 million mobile phones in the third quarter, compared to 434.1 million units in the same quarter a year ago.

The increasing pervasiveness of smartphones has helped Qualcomm grow earnings at an annual rate of 26.9% since 1999. Qualcomm is best suited for growth investors, but the firm still buys back shares and pays a dividend. Although the yield of 1.63% is modest, the company's stellar growth prospects more than compensate.

The stock's price-to-earnings ratio (P/E) of about 17 is a discount compared to an average P/E of 20.11 for the Communications Equipment industry and a discount compared to the S&P 500 (INDEXSP:.INX) average P/E of 15.67.

Technology is also one of the most cash-rich and least indebted of all sectors, making it a great combination of both offense and defense for investors worried about market uncertainty but unwilling to completely sit on the sidelines.

This article by John Persinos was originally published on Investing Daily.

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