When tech titans are talked about, names like Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC), Cisco (Nasdaq:CSCO) and more recently Apple (Nasdaq:AAPL) seem to reliably come up. Given its central role in wireless communication (first phones, now smartphones, tablets and other devices), it is a little strange that Qualcomm (Nasdaq:QCOM) doesn't come up in that conversation. With its fingers in over 300 million devices shipped in the third quarter, this is a chip company still worth a look from most investors. (For more on the tech industry, read A Primer On Investing In The Tech Industry.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

A Strong Close to the Year
Unlike so many chip stocks, that rise and fall with the success of particular phones or manufacturers, Qualcomm seems to have a firmer footing. Revenue rose nearly 40% this quarter (and up about 14% sequentially), with 39% growth in its core chip business, 48% growth in its licensing revenue and a 5% decline in its small wireless and internet segment.

Earnings were not quite as strong. Gross margin slid five points from the year ago level, and operating income growth trailed revenue growth at 29% versus last year, and 11% versus last quarter. Nevertheless, that still translates to an operating margin of over 30%, despite the fact that Qualcomm spends a whopping 20% of its revenue on research and development (R&D).

The Tech Everyone Wants
It's a fairly narrow list of successful handset developers that do not cut a regular check to Qualcomm for chips or technology. It supports phones that run operating systems from Apple, Microsoft and Google (Nasdaq:GOOG), and its chips are used by the likes of Apple, Nokia (NYSE:NOK), Research In Motion (Nasdaq:RIMM) and Samsung.

That huge ongoing investment in R&D continues to pay dividends for this company. The company's Snapdragon processor platform is looking fairly strong, and could be a real headache for the likes of Nvidia (Nasdaq:NVDA). Not only did Qualcomm displace Intel in the next iPhone, but it has already signed up numerous vendors for 4G supply or licensing deals. Speaking of licensing, Qualcomm collected licensing fees amounting to about 3.5% of the handset price from nearly 190 million devices in the third quarter. (To learn the effect R&D has on a business, see R&D Spending And Profitability: What's The Link?)

Margin Erosion and Competition
Qualcomm is not without a few challenges. Broadcom and Texas Instruments (NYSE:TXN) would love to chew into Qualcomm's leadership, and other chip makers like Intel and Nvidia have explicitly targeted mobile platforms like smartphones and tablets as important markets.

Listening to management's guidance, it is also clear that margin pressures are still very real. Handset average selling prices have generally been trending down, and that saps some momentum from that lucrative licensing business. What's more, Samsung has taken some high-end business in-house - while this is not something that most of Qualcomm's customers can follow (Nokia doesn't make chips), there is that threat of swapping out for cheaper options.

The Bottom Line
Simply put, Qualcomm has a great business, and management continues to funnel a large amount of money back into the business - forcing rivals like Broadcom to keep spending as well. Moreover, the mobile market just does not seem to be running out of steam; even as nearly everyone seems to have a phone already, many of them want the new, new thing.

I frankly wish Qualcomm wasn't so popular. Out of the 42 analysts listed on Thomson, 31 have Buy/Strong Buy ratings. Still, even with that huge popularity, the stock actually looks undervalued right now, on a cash flow basis. There is no shortage of attractively-priced chip stocks today, but Qualcomm absolutely deserves at least some consideration for investors looking to buy into tech today. (If you would like to learn more about the sector as a whole, check out Technology Sector Funds.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  7. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  8. Economics

    The 4 Countries That Produce the Most Chocolate

    Discover the four countries in the world that manufacture the largest amount of chocolate and learn basic facts about the chocolate industry.
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!