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QUALCOMM, Inc. (QCOM): This Company Looks Stagnant But Is Still Going Strong

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QUALCOMM, Inc.When someone expects a lot from you, it might either put a lot of pressure on your performance or even your best might not please them. This is actually what is happening with QUALCOMM, Inc. (NASDAQ:QCOM) because despite stellar top and bottom line growth at nearly 24% year-on-year in the last five years, the stock has appreciated just 15%. The company is soon releasing its third quarter earnings; let’s try to analyze how this quarter will probably unfold for QUALCOMM, Inc. (NASDAQ:QCOM).

On revenue

According to analysts, Qualcomm is expected to post revenue of $6.05 billion, which, if achieved, would be 30.90% growth from the year-ago period. The estimates seem to be well in line with the company’s guidance of $5.8 billion to $6.3 billion announced in its last earnings call.

The company has some solid clientele such as Apple and Samsung, who use QUALCOMM, Inc. (NASDAQ:QCOM)’s chips and processors to power their phones. In the recent quarter, it powered Samsung’s flagship Galaxy S4 and many other devices with its Snapdragon 600 chipset, which is gaining good momentum. Further, royalty collection has strengthened because of the increase in 3G/4G device shipments in both developed and emerging regions.

Thus, achieving the analysts’ estimate on revenue seems to be in the company’s comfort zone.

On earnings

Earnings are expected to come in at $1.03 a share, which would be an impressive 21% increase from last year’s figure of $0.85. In the last four quarters, QUALCOMM, Inc. (NASDAQ:QCOM) has beaten analysts’ estimates two out of four times and the other two occasions have been a miss and a hit.

As the growth in top line corresponds with the bottom line, it is clearly evident that Qualcomm’s margins are shrinking, which is a reason to worry. The company’s equipment and license business are both under margin pressure. In its license business, as it earns lower royalty on 4G than 3G currently, its revenue is declining. Further, margins from its equipment business, which were about 20% historically, are expected to be 17% because of declining average selling price and increasing competition.

Outlook

QUALCOMM, Inc. (NASDAQ:QCOM)’s license business’ revenue and profits will fall when developed markets shift to 4G, as it would earn 3.3% royalty on 4G/LTE, while it earns a 5% royalty for 3G. The bright side remains that the complete transition from 3G to 4G/LTE will take at least a couple of years in the developed markets. Moreover, the need to backward-integrate will provide Qualcomm with ample opportunities in developing countries as they are shifting to 3G now.

The company’s margins have reduced, but its superior business and market dominance cannot be challenged. It held nearly 86% of the total market for LTE chipsets in 2012 and continues the same dominance this year too with its first ever LTE-Advanced smartphone, the Samsung Galaxy S4 LTE-A, launched in late June. The new Galaxy S4 LTE-A, utilizing LTE carrier aggregation, will offer data rates up to 150 Mbps, thereby offering twice the current LTE speeds.

QUALCOMM, Inc. (NASDAQ:QCOM)’s Snapdragon 800 processors are designed to hold up LTE carrier aggregation without affecting the battery life. Snapdragon 800 is expected to go into commercial position soon and is expected to feature in 200 phones and tablets to be released later this year. The company is well ahead of competition as the MDM 9X25 and Snapdragon 800 chipsets are its third generation of LTE modems, while most of the competitors are still struck with the first generation. Being well ahead of competition and the only provider of LTE-Advanced features, Qualcomm is poised to perform in the growing smartphone market.

The only close competitor to Snapdragon 800 is NVIDIA Corporation (NASDAQ:NVDA)’s fourth generation Tegra chips, Tegra 4i, which are expected to be launched in the beginning of next year, and Broadcom Corporation (NASDAQ:BRCM)’s recently launched BCM21892. The Tegra 4i will be half the size of Snapdragon 800 processor and BCM21892 is currently the smallest LTE 4G enabled chip in the industry. The smaller size of the chips makes them cheaper to produce and more energy efficient. However, QUALCOMM, Inc. (NASDAQ:QCOM)’s earlier launch of its Snapdragon 800 processor with an LTE –Advanced feature places it in an advantageous position, as there is no other competing product.

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