Anybody who was lucky enough to buy this stock at the beginning of 1999 and sell at the end of the year made a gargantuan 2600%. The interesting thing is that this wasn’t some penny stock that caught lightning. It was an established player in the technology sector. Unfortunately for the bulls, it hasn’t been pleasant owning the shares since then. That could be about to change for holders of Qualcomm (QCOM).
Great Report
Qualcomm reported a fabulous September quarter as it came in with 53 cents per share, easily eclipsing the 46 cents expected by analysts. Sales also beat expectations by $80 million. Even better for investors, the company said that earnings in the current quarter will be “at least” 58 cents per share, above the current 52 cents expected.
Quite simply, the smartphone revolution is benefiting Qualcomm, who makes chips that run radio functions in those phones. According to a consulting firm called PRTM, the company’s chips were found in 77% of phones that run Google’s Android software. The great thing about the company’s business model is that it is dependent on high-income, high-margin licensing and royalty deals rather than asset intensive businesses. This allows management to keep costs down and margins high. Investors reward that kind of efficiency with higher multiples.
I am not a technology expert, but from what I have gathered from reading analyst reports is that the company is getting heavily involved in the new technologies that are driving industry-wide growth. For example, 4G chips, and the emerging tablet business look to feature prominently in the company’s future. Also, Qualcomm could supply chips to the Verizon iPhone starting in January.
Qualcomm was always well-run and had good financials, but I think investors weren’t sold that the company was involved enough in the higher growth segments of the market. That perception is certainly changing.
Room to Run
The stock is still attractively price despite the post-earnings pop it received last Thursday. It is trading at 18.8x next year’s estimates of $2.55 per share, but I would expect those estimates to be hiked significantly by analysts in the coming days and weeks. Not only will earnings rise, but I think that investors will give the stock a higher price/earnings multiple due to the resurgence of growth. The bottom line is that it’s not too late to get on board.
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