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Qualcomm Is Positioned for Growth in 2014 Despite Shift to Emerging Markets


To stay ahead of the game, the company plans to diversify, focus on high-growth opportunities, and invest heavily in the low end of the market.

Qualcomm Incorporated (NASDAQ:QCOM), a leader in next-generation wireless technologies, reported fiscal Q4 2013 earnings of $0.86 per share, registering a strong growth of 18% year-over-year. Revenues came in at $6.48 billion, up 33% (y/y), and better than analyst expectations of $6.35 billion. Higher equipment sales volume and price, increased service contracts, higher revenue per contract, and higher total licensing revenues primarily drove growth for the company.

Qualcomm's technologies underpin the global growth of wireless data, and its semiconductor solutions are used across the industry's flagship smartphones. The company gets the majority of its total revenue from chips, and from licensing technology that is central to modern mobile-phone networks and handsets. Qualcomm's patent portfolio focuses on hardware and is highly valuable, pulling in over a billion dollars per quarter in licensing from companies such as Apple (NASDAQ:AAPL) and Samsung (OTCMKTS:SSNLF).

Market IQ places Qualcomm in the top right quadrant of the quality/value chart indicating high quality and investment value (see below).

Click to enlarge

The company's qualitative strengths can be seen in several areas such as return on equity (ROE), revenue growth, and financial strength.
  • ROE increased to 17.62% in fiscal Q4 2013 vs. 16.89% in fiscal Q4 2012. Additionally, Qualcomm offers a higher ROE when compared to the peer average of 8.14%.
  • Qualcomm has a sustainable growth rate of 12.58%, which sits higher than the peer average of 4.48%. Since fiscal Q4 2012, the company has also increased revenues by 33%, which have helped boost the earnings per share.
  • Qualcomm has zero debt on its balance sheet, indicating strong financial standing relative to its levered peer group.
Market IQ's valuation metrics suggest that Qualcomm is inexpensively priced. With a price-to-cash-flow of 12.12 and a price-to-forecasted-earnings of 18.03, Qualcomm is relatively cheap when compared to its peer group (see below).

To diversify its portfolio, Qualcomm is focusing on new markets such as "connected homes" decked out with growing quantities of sensors and communications chips in thermostats, locks, and power switches.

In September 2013, Qualcomm also released a smart watch called Toq, which uses Qualcomm's proprietary display technology designed to serve as a second display to a smartphone. Qualcomm believes the technology is a good fit for the wearable technology space, and hopes Toq will convince others to license it. Additionally the smart watch release means that the firm may have a few other tricks up its sleeve, as it plans to diversify going forward.

While the smartphone and tablet markets continue to be strong in the US, it is likely that growth momentum will reach a saturation point at some point in the future. As more Americans become users, financial demographics in the space are bound to become less attractive. Keeping this in mind, Qualcomm is rightly eyeing new markets to drive future growth in earnings and revenues.

Future smartphone volume growth is likely to come from emerging markets, where 3G/4G penetration is still low and mobile carriers aim to increase usage through smartphones. Perhaps China offers the highest growth potential for Qualcomm in 2014. While China Mobile (NYSE:CHL), the world's largest wireless carrier, hasn't paid Qualcomm licensing fees after opting to use an alternative technology for its current data network, Qualcomm expects that to change as China Mobile plans to shift to a higher-speed technology for mobile networks called long-term evolution, or LTE. The network transition implies a wider base for Qualcomm from which it can collect royalties and increase its chipset market share. Note: China Mobile is the world's largest wireless carrier with a subscriber base of over 750 million, almost seven times the size of Verizon (NYSE:VZ), the largest wireless carrier in the US.

While the pending nuptials between Qualcomm and China Mobile bode well for the chipmaker overall, it will not be without its own baggage. Market demographic and foreign regulations pose challenges for Qualcomm.

Demographic challenges: As the smartphone industry begins shifting away from wealthy markets such as the US and toward emerging economies such as China and India, profitability margins for Qualcomm might get adversely impacted. The average selling price of a smartphone is expected to be low as lower income demographics are exploited. Low-end smart phones, which are likely to drive sales growth, will put pressure on licensing revenues (which are based on handset prices) and chipset margins in the longer term.

Regulatory challenges: Foreign corporate scrutiny could prove to be a threat for Qualcomm and disrupt its growth plans. Recently, China's National Development and Reform Commission began an investigation on QCOM related to an anti-monopoly law under a broader crackdown on business practices that drive up consumer prices. Qualcomm's existing customers in China include Lenovo Group Ltd. (OTCMKTS:LNVGY), Huawei Technologies Co. (SHE:002502) and ZTE Corp. (SHE:000063).

While there may be small headwinds, Qualcomm remains well positioned from a growth standpoint. The company plans to diversify, focus on high-growth opportunities, and invest heavily in the low end of the market. For 2014, Qualcomm has given a modestly bullish outlook, predicting double-digit growth in earnings (10%-14%), and revenues (5%-11%) on the high end. Additionally, the firm also looks attractive from its cost perspective. Qualcomm announced that operating expenses in fiscal 2014 would grow between 5%-7%, much less than the 20% annual growth seen in the past three years.

Going forward, Wall Street firms are also bullish on the chipmaker with 20 out of 25 analysts covering the stock having a strong buy rating. Additionally, Qualcomm has managed to make it to the 2014 conviction buy list of investment banks like Goldman Sachs (NYESE:GS) and UBS Ag (NYSE:UBS), which should be an added catalyst that could take its share price higher.

This article was written for Minyanville by Adil Yousuf of Market IQ.

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This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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