Inside Wall Street: Qualcomm Is Poised to Be a Tech Star
Already, tech stars Google (GOOG), Apple (AAPL) and Amazon.com (AMZN) are leading the parade in the market's advance that started last year -- and surprised many investors. And some market watchers expect tech to stay ahead of the pack for a rambunctious ride into the new year.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%That's despite a mainstream forecast for the market that isn't so bullish. The consensus view is that equities will indeed rise, but at a muted pace, given the many tough problems the U.S. economy faces.
But investors may be in for another surprise. "Our outlook is bullish, and we are placing our big bets on technology," says John Maloney, president of investment firm M&R Capital Management. He was far from bullish until last April, when he started to believe that "the market's turnaround was for real." He then started snapping up tech shares.
"We are value investors, but we believe in the current economic situation we're in, investors should look for real growth, and technology is the sector that will provide such badly needed growth," says Maloney.
A Doubling of the Stock Price?
He had been buying such techs as Intel (INTC), Cisco Systems (CSCO) and Accenture (ACN), but Maloney's latest top tech pick is Qualcomm (QCOM), which has been on quite a tear since hitting a 52-week low of $32.64 a share on Mar. 2, 2009. It has since climbed to $47. Predicts Maloney now: "We think Qualcomm will double from this price level in four years."
"Qualcomm dominates the fast-growing wireless handset market and continues to gain market share," he notes. It's the largest developer of chips based on its proprietary CDMA wireless phone technology, and it's now mining new lucrative markets. CDMA stands for code division multiple access, which allows several transmitters to send information simultaneously over a single communication channel. It lets several users to share a bandwidth of different frequencies.
The technology is widely used among U.S. mobile phone providers (Verizon Wireless and Sprint use CDMA; AT&T uses GSM, a competing technology that's more popular than GSM, especially outside the U.S.).But Qualcomm is also finding new markets for its CDMA chips, including Amazon's Kindle e-reader, Google's Android opererating system for mobile devices and laptops from Hewlett-Packard, Dell, Panasonic and Sony. Qualcomm will also provide its FLO TV system to Apple's iPhone and iPod Touch to bring live mobile TV to users of those devices.
In addition, Qualcomm has also partnered with some health care companies to help create mobile electrocardiogram readers, remote patient monitoring and glucose-monitoring cell phones. Qualcomm gets royalty fees of 3.4% to 4% on each handset sold with its CDMA system.
Weaker Overseas, but Potential for Growth
While GSM (global system for mobile communications) is the standard in Europe and has a far wider 80% share of the global phone market, Qualcomm has come up with a hybrid of CDMA and GSM -- called WCDMA -- that could be integratedinto phones in Europe. With the WCDMA, Qualcomm is widening its share of the world market.
The risk to Qualcomm, of course, is if some areas of the world, such as emerging markets, continue to cling to GSM. That would limit its adoption to lower levels than Qualcomm anticipates.
Maloney figures Qualcomm's earnings will grow at 17% to 18% annually over the next five years. With such strong projected earnings growth and its current cash stash amounting to about $11 a share (the company has no debt and generates free cash flow of about $2 billion a year), Qualcomm is surely a "highly attractive investment bet in technology," says Maloney.
Only One Sell Recommendation
Ehud Gelblum, analyst at Morgan Stanley, agrees. He says Qualcomm is well positioned to benefit from the "key growth themes in communications equipment, namely mobile data -- through 3G penetration -- and smartphone growth."
Rating the stock overweight with a 12-month target of $57, Gelblum expects Qualcomm's market share to grow from an estimated 38% in fiscal 2009 to 51% in fiscal 2012. He sees the fast rise in demand for smartphones accelerating the migration to Qualcomm's new 3G CDMA and WCDMA systems.
Gelblum figures Qualcomm will earn $$2.37 a share in fiscal 2010 (ending Sept. 30), and $2.73 in fiscal 2011, up from fiscal 2009's $2.20.
Widely followed on Wall Street by 38 analysts, Qualcomm gets top-rated billing, with 31 recommending the stock as a buy, and six rating it neutral. Only one has a sell recommendation.
Most of Qualcomm's big shareholders are large U.S. institutional investors. But as the company continues to broaden its reach in the rapidly growing smartphone market worldwide, its stock should also start appealing to global investors as a strategic investment in the world of technology.