Apple Inc. (AAPL), Microsoft Corporation (MSFT): Is QUALCOMM, Inc. (QCOM) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does QUALCOMM, Inc. (NASDAQ:QCOM) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell QUALCOMM, Inc. (NASDAQ:QCOM)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation: Is share price growing in line with earnings per share?
3). Opportunities: Is return on equity increasing while debt to equity declines?
4). Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at QUALCOMM, Inc. (NASDAQ:QCOM)’s key statistics:

QCOM Total Return Price Chart

QCOM Total Return Price data by YCharts.

Criteria 3-Year* Change Grade
Revenue growth > 30% 116.9% Pass
Improving profit margin (4.1%) Fail
Free cash flow growth > Net income growth 72.1% vs. 108% Fail
Improving EPS 97.8% Pass
Stock growth (+ 15%) < EPS growth 114.2% vs. 97.8% Fail

Source: YCharts. *Period begins at end of Q2 2010.

QCOM Return on Equity Chart

QCOM Return on Equity data by YCharts.

Criteria 3-Year* Change Grade
Improving return on equity 18.8% Pass
Declining debt to equity (100%) Pass
Dividend growth > 25% 84.2% Pass
Free cash flow payout ratio < 50% 28.5% Pass

Source: YCharts. *Period begins at end of Q2 2010.

How we got here and where we’re going

QUALCOMM, Inc. (NASDAQ:QCOM) stumbled early thanks to a few narrow misses, but acquitted itself quite well in the end with excellent equity and dividend results, earning six out of nine passing grades. Despite exceptional revenue growth, profit margins have recently been pinched, and free cash flow has failed to keep pace with the bottom line. There’s potential for a perfect score next year, but Qualcomm will have to improve its free cash flow without allowing its shares to get too far ahead of the growth in its earnings. Let’s dig a little deeper to see what Qualcomm is doing to maintain or grow its position.

My fellow Fool Anders Bylund, in his recent QUALCOMM, Inc. (NASDAQ:QCOM) earnings analysis, pointed out that the company should be able to boost its revenue growth on the back of its market leadership in high-speed data devices. Qualcomm’s high-end processors have become an integral component in many Android mobile phones and tablets. In addition, most Apple Inc. (NASDAQ:AAPL) products are also powered by Qualcomm’s high-speed wireless processors. There are more mobile phones than human beings at the moment, but only about one billion of those are smartphones — that’s at least six billion more smartphones to go!

Qualcomm has also been tapping into emerging markets, with a focus on display technology as well as health care (telemedicine) applications. Fool contributor Evan Niu notes that Microsoft Corporation (NASDAQ:MSFT) has recently decided to move away from NVIDIA‘s graphics solutions for its second-generation Surface RT. Qualcomm’s high-performance Snapdragon S4 processors, along with its undisputed capabilities in the area of cellular integration, will certainly line up well with Microsoft Corporation (NASDAQ:MSFT)’s plans to add cellular functions to newer Surface models. Qualcomm also recently partnered with leading online health information provider WebMD Health Corp. (NASDAQ:WBMD) to leverage its cloud-based remote health management platform, exclusively designed for the telemedicine segment.

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