As Goes Apple, So Goes Qualcomm? Think Again
Chipmaker Qualcomm (QCOM) is the most popular kid in the tech sector at the moment, a stock that’s attracted buy and overweight recommendations from more than three dozen industry analysts. And thanks largely to worries that had more to do with Apple (AAPL) than with Qualcomm, its share price is cheaper, based on PE ratio, now than it’s been for most of a decade.
Qualcomm’s valuation dropped last year when Apple iPhone shipments failed to live up to investor expectations. Qualcomm, which supplies the processors, saw its share price fall along with other iPhone suppliers, such as Jabil Circuit (JBL) and Cirrus Logic (CRUS), as seen in a stock chart.
In fact, a lot of tech stocks have been rocky lately as investors try to figure out whether iPhones, Google’s (GOOG) Android phones, Samsung’s Galaxy or something else will be the big seller of the future. The same sort of trend guessing goes on in the tablet market, where Amazon.com (AMZN) sells Kindle Fire against Apple’s iPad and Google’s Nexus. But in the case of Qualcomm, perhaps the sellers underestimated the breadth of its customer base. Qualcomm wins any which way, considering it makes processors for all those products and more.
Qualcomm plays a huge role in the mobile devices – products that may be the world’s biggest growth industries since Apple first sold a Macintosh computer. Sales of smartphones and tablets are expected to overtake personal computers this year. Strategy Analytics reports that revenues for smartphone applications processors alone rose 58% year-over-year in the third quarter of 2012, and Qualcomm took a whopping 42% of that business.
In fact, Qualcomm’s revenue was gaining market share when one of its biggest competitors, like NVIDIA (NVDA), struggled to maintain revenues.
Still, competition amongst the processor makers themselves remains the biggest threat for investors in Qualcomm. Almost every chip maker is working on ways to gain in the mobile device business, including gargantuan competitor Intel (INTC). While Intel didn’t do great with previous mobile chips, a smaller chip it expects to launch mid-2013 might finally make it a contender in Qualcomm’s market. Both of them compete for the high-end devices, and both would be hurt if consumers decide that cheap smartphones are smart enough now.
It’s possible there’s enough room in this market for several major players to do well. Worldwide, smartphone shipments are forecast to rise by 50% this year. Qualcomm forecasts some 20% to 30% revenue growth in fiscal 2013 (which ends Sept. 14) and about 11% to 20% earnings per share growth. YCharts gives the company a rare perfect score for fundamentals. Yield on the company’s dividend yield now is about 1.6%. Qualcomm's dividend has been rising rapidly, which is more important than current yield, and its relatively low payout ratio suggests there is room for more dividend hikes. Its share price value rating is average.
Forecasting fashion trends is always risky, and it’s still unclear whether Apple’s iPhone will continue to lose ground to competitors. But if Apple is selling fewer iPhones, someone else is selling more of another smartphone. And there’s a decent chance that Qualcomm’s in on that growth too.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
Filed under: Company Analysis