Sometimes it makes more sense to take a side bet instead of trying to figure out the outcome of the main event. Everybody has an opinion and how the battle between Apple Inc. (Nasdaq:AAPL), Samsung Electronics Co., Ltd., and others in mobile devices will play out, but nobody knows. On the other hand, it's quite a bit harder to envision how Qualcomm Incorporated (Nasdaq:QCOM) doesn't win in any of those scenarios. While there will always be some questions surrounding QCOM (Why isn't there more operating leverage? How is Apple's unit growth tracking? Will Broadcom Corp (Nasdaq:BRCM) grab share?), I believe Qualcomm remains a very good stock to own, so long as you believe in the overriding idea of growth in the mobile device market.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

Qualcomm Delivers Again in Fiscal First Quarter
Qualcomm reported a strong start to its fiscal year, with good performance pretty much down the line.

Revenue rose by 29%, good for a slight beat relative to the average sell-side guess. Chip revenue rose 34% on even growth in shipments and ASPs, while licensing revenue rose 22% on a similar increase in global handset shipments and a 6% increase in average ASPs (the two do not add up to the licensing revenue growth rate, due to varying royalty/license rates).

Qualcomm not only generated more sales this quarter, but the company did so more profitably. Gross margin was slightly improved on last year (about 20bp), but more than a point better than analysts expected. Operating income rose almost one-third, even with high ongoing R&D investment rates.

Second Quarter Looks a Bit More Challenging
Qualcomm management doesn't usually get too aggressive with its guidance, so it may well prove to be the case that they were conservative again after this quarter. Even so, the company did guide slightly above the prior estimate for fiscal Q2 revenue and EPS.

I do expect there to be some concerns about Qualcomm's operating leverage. It looks like gross margin is going to come under pressure next quarter, as handset prices reset and the company sees some diseconomies of scale tied to new manufacturing runs. Likewise, the company remains committed to funneling a substantial portion of profits back into the business through R&D.

SEE: R&D Spending And Profitability: What's The Link?

It Will Always Be Something with Qualcomm
Few companies have managed to create a business like Qualcomm. Because of the company's dominant IP in CDMA and LTE, they are a toll-taker in the mobile world and collect 3% or more of the value of handsets from licensees. At the same time, they are a powerful player in the chips themselves, with nearly 50% share in baseband chips.

That doesn't immunize the company from investor worries. From time to time there are concerns that the company may be supplanted by new technology/standards or lose its edge in the transition between generations - there were worries (now looking largely unfounded) at one point that the company's position in 4G might not be as strong.

Likewise, there are worries tied to competition and execution. Broadcom very much wants to be a player and they have the IP quality to be a threat. Likewise, Intel Corporation (Nasdaq:INTC) may not be quite as formidable on the IP side, but they have manufacturing expertise and capacity. To that end, it's worth noting that Qualcomm does not control its own manufacturing and has had some challenges (like the yield and supply issues with 28nm chips earlier in 2012).

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
I can understand if investors are concerned that lower handset ASPs may reduce Qualcomm's licensing revenue without a corresponding increase in unit growth, but I think that the mobile market (on balance) remains a good place to be for the foreseeable future. Likewise, while I do believe Broadcom will become a bigger player, I think that ought to be a bigger worry to Intel, Marvell Technology Group (Nasdaq:MRVL) or STMicroelectronics NV (NYSE:STM) than Qualcomm. As for the operating leverage issue, I frankly have no worries here - Qualcomm generates ample cash flow already and if heavy R&D reinvestment is the cost of maintaining share, then so be it.

I model long-term revenue growth of 8% for Qualcomm, and while I think there could be some year-to-year choppiness in operating margins and free cash flow (FCF) generation, I think the company will continue to improve its conversion rates in the years ahead. Overall, I think Qualcomm can continue to grow free cash flow at a low double-digit rate, and that supports a fair value in the low-to-mid $80s.

At these prices, I'm very tempted to buy Qualcomm shares for my own account, and I think they are an appealing investment option for investors still looking to gain exposure to mobile device growth.

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

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. 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.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... 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!