Stock of the Day - March 1, 2009 - QCOM

Qualcomm Inc. (QCOM)

Qualcomm (QCOM) is the company that makes the chips inside of your cell phone.  The company, which is the largest supplier of wireless chips, introduced the high-speed CDMA technology that allows smart phones to function at 3G speeds.  There are many reasons why I think QCOM is a great company, and I believe that the factors that make QCOM a great company also make it a great investment opportunity. 

The first thing that catches my eye with QCOM is the company’s spotless financial situation.  QCOM currently holds around $14 billion in cash, and it has no long-term debt.  The company’s current assets outweigh its current liabilities by 5 to 1, meaning that QCOM is very financially well positioned and will not have any problems paying back its near-term debt obligations.

But, QCOM is much more than a stable value company, and with so many growth opportunities, it would be unfair to label it strictly as a large-cap value stock.  The company expects demand for 3G mobile devices to grow 20% annually, and the long-term earnings growth rate for the company is also expected to be at around 20%.  So, how does QCOM make money, and where will the company’s growth come from?

Qualcomm makes its money by licensing and selling its wireless chips to phone manufacturers such as Motorola, Samsung, Research in Motion, and almost every other cellphone maker.  Since QCOM patented the CDMA technology that is used in almost every single smart phone, every time a 3G phone that contains a QCOM chip is sold, the company that sold the phone has to pay QCOM royalties of $4 to $8.  This is a very low cost business for QCOM, and it makes a profit margin of around 90%. 

QCOM’s growth potential is very correlated to the growth of smart phones and 3G technology across the world, so it is great news that 3G penetration is expected to increase from 40% now to between 70% to 80% in 2012.  With QCOM’s dominant share of the wireless chip market, as more and more people start buying smart phones and upgrading to faster mobile devices like BlackBerrys and iPhones, the company’s sales and profits will continue to grow.

Another very interesting growth driver for Qualcomm will come from China.  China’s government recently passed a huge stimulus package that will boost consumer spending and spend a lot on the country’s infrastructure.  The stimulus package includes a $40 billion investment to upgrade the country’s telecommunications system.  QCOM will most likely be a huge part of this telecommunications plan, and the company has a lot to benefit from, as it will begin to move into China and greatly expand into a country that is trying to become more technologically advanced.

Qualcomm will also benefit from its new partnership with the world’s largest cellphone maker, Nokia (NOK).  QCOM will supply Nokia with chips for its smart phones starting in 2010, and this deal will give QCOM access to an even bigger share of the smart phone market.  The partnership will boost QCOM’s chip sales and increase the company’s profits, as Nokia will try to penetrate the U.S. phone market with phones that are powered with QCOM technology.

For the short-term, sales and profits will continue to be choppy as a result of the global economy.  The company lowered expectations for 2009, as it announced that the global economic slowdown has slowed demand for its chips.  Many mobile carriers have also released statements saying that they are preparing for a tough 2009, and Nokia is expecting the downturn to be long and deep.

Having said this, QCOM is still the best long-term play if you believe that smart phones will continue to gain popularity in the future and if you believe that more and more phones will run on 3G and eventually 4G technology.   As 3G infrastructures expands, and as more phones use QCOM’s technology, the company’s licenses and royalties will continue to grow.

QCOM has a very strong economic moat (Term of the Day on Feb 26^th) due to its license on the CDMA technology that is used in smart phones, and due to its ability to mass-produce chips at low costs.  The company has a dominant position in its industry, and it should continue to maintain its dominance and grow at least 20% every year.  While it might be smart to wait a couple months for cellphone demand to reach a bottom in mid-2009, QCOM has too much long-term growth potential to not consider investing in it at some point soon.  

Niki Pezeshki

College Trillionaire