Investors who have been waiting in the hopes of a chance to pick up Qualcomm (Nasdaq:QCOM) shares a little cheaper have gotten their wish after fiscal second quarter results. Struck between high demand for 28nm chipsets and supplier issues, Qualcomm lowered guidance and the Street punished the shares accordingly. With production problems likely a temporary setback, this may well be a good chance to build a position in a stock that is often expensive.

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Q2 Results Pretty Good
Qualcomm had a relatively solid fiscal second quarter report. Revenue rose 28% from last year (and 6% from the prior quarter) to exceed the average Wall Street guess by a modest margin. While the chip business saw a little sequential softness (down 1%), it was a bit stronger than expected, and likewise with the licensing business, where revenue jumped 20% from the first quarter.

Underpinning these results, Qualcomm saw a 3% sequential decline in chip shipments, but a 2% price increase. Overall, the handset market (from which Qualcomm derives license revenue) rose 25% sequentially to about 241 million units.

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Guidance Buries the Story
The fact that Qualcomm is seeing strong demand for chips that go into Apple (Nasdaq:AAPL) iPhones and iPads, and strong demand from Chinese equipment manufacturers really doesn't matter right now. What matters is that management significantly revised the next quarter's outlook based on supply problems.

Though leading fab company TSMC (NYSE:TSM) has been cagey before on its 28nm production issues, that problem seems to be coming home to roost now. Due in large part to demand from Apple for new 28nm chips, there is simply more demand than Qualcomm can meet right now. While the company is going to work with other fabs to make up the difference, there's an inevitable short-term impact.

It is also worth wondering what, if any, long-term impact this will produce. At a minimum, I'd say that TSMC is in some trouble, as embarrassing a major customer is rarely good for business. I also wonder if there will be any consequences to Qualcomm's ongoing business. Apple is notoriously unforgiving with supply issues (as OmniVision (Nasdaq:OVTI) has seen), but if Qualcomm prioritizes Apple, it risks alienating other customers as well.

Last and not least, I've seen a few analyst notes this morning that question whether this will lead Qualcomm to consider building some in-house manufacturing capacity. That seems like a massive overreaction to the issue, to say nothing of the fact that in-house capabilities don't exactly guarantee against future issues.

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The Bottom Line
Qualcomm has a strong business, but not a bulletproof business. These supply issues show that they're vulnerable to events outside their direct control, and the stories of Broadcom (Nasdaq:BRCM) taking away some Qualcomm business at Samsung underscore the endless motion of competitive dynamics.

That said, Qualcomm is a very good chip company that has plenty of room left to run just from the smartphone and tablet market expansion.

All of this Qualcomm love aside, the shares are not exactly a screaming bargain. True, they're cheaper than before, but even low-teens compound cash flow growth assumptions for the next decade produce a target just around $80. That's probably enough undervaluation for an interesting rebound trade, but it's not as though Qualcomm is any sort of bargain-basement stock today.

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

Tickers in this Article: QCOM, BRCM, TSM, AAPL

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