QUALCOMM, Inc. (QCOM): Despite Lower Earnings Guidance, This Chipmaker Is a Buy

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QUALCOMM, Inc. (NASDAQ:QCOM) is benefiting from the increasing demand for smartphones and the growing focus of network operators worldwide to implement high-speed wireless technology, popularly known as LTE, or long-term evolution.

The chip maker's stock has been a bit volatile lately. Despite record earnings, shares fell 7% due to the company's lower-than-expected earnings outlook for the upcoming quarter. Since then, the stock has moved up in line with market expectations. So, where will the stock move from here?

Growth drivers

QUALCOMM, Inc.QUALCOMM, Inc. (NASDAQ:QCOM) has teamed up with Japan’s Sharp to mass produce displays for mobile devices, and those components have the potential for much faster response times and use a fraction of the power required by LCDs. However, manufacturing cost is the main concern here, and if the company manages to control the cost, this technology will prove an important weapon in developing markets.

The chip maker continues to up its R&D spending to take advantage of new market opportunities, such as tablets. QUALCOMM, Inc. (NASDAQ:QCOM) spent $1.88 billion on R&D and SGA expenses in the second quarter, which is a 21% jump from the same period a year ago and an increase of 11% sequentially. For the current quarter, the company expects a 2%-4% rise in R&D spending.

Until now, major devices like Samsung's Galaxy S4, the HTC One, and the Sony Xperia Z, were using Snapdragon 600, but the more powerful Snapdragon 800 will now be used in tablets and phablet devices. The initial responses show that Snapdragon 800 is much more powerful and equally efficient, and will go a long way to enhance offerings from the chip maker.

QUALCOMM, Inc. (NASDAQ:QCOM) not only makes chips for high-end devices like the iPhone and Galaxy lineup, but its offerings are also used in lower-priced handsets popular in Asia and other emerging markets. These markets will help the company to carry on the growth trend once the U.S. market saturates. However, lower end devices command a lower margin for Qualcomm, as manufacturers pay fewer royalties and acquire cheaper components.

Comparison with rivals

Share Price* 52-Week Range PE Forward PE ROE
BRCM 33.77 28.60 - 37.85 23.41 10.67 11.02%
INTC 24.06 19.23 - 26.90 11.88 11.76 21.06%
QCOM 60.95 53.09 - 68.50 17.09 12.41 17.87%

*as of June 5, 2013.

Broadcom Corporation (NASDAQ:BRCM) and Intel Corporation (NASDAQ:INTC) are QUALCOMM, Inc. (NASDAQ:QCOM)'s closest competitors. Shares of all three firms are trading in the upper range of their respective 52-week highs, reflecting positive sentiment for the industry. For Broadcom, PE looks slightly higher, making it a bit more expensive, while Intel and Qualcomm look decently valued. Forward PE for both Broadcom Corporation (NASDAQ:BRCM) and Qualcomm reflects that earnings are expected to rise for these two. For Intel Corporation (NASDAQ:INTC), there is a slight change in forward PE, suggesting earnings are expected to be flat. Intel commands the highest ROE among the three, followed by Qualcomm.

Concerns

The advantage enjoyed by the chip maker in the LTE segment may soon wither as an increasing number of smaller players are attracted to the high-growth market. These players will be a major challenge for QUALCOMM, Inc. (NASDAQ:QCOM) in the developing countries, as they are improving on technology and are ready to adjust on profits in exchange for market share.

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