Why I'm Buying Into This Major Mobile Play

This article is part of the Fool's real-money stock picks program. Follow Andrew and all his writing on Twitter, @AndrewTonner.

I've spent a lot of time dwelling on some of the emerging trends in technology. Over the past several days, I've published a series of excerpts from my interview with Chris Anderson at Wired magazine and the Marriott's Culturazzi event at the Union Square Marriott in San Francisco. And Chris' expert opinion was the final thing I needed to force my hand for my latest addition to the real-money portfolio I manage for Fool.com (more on that in a bit).

For the uninitiated, Chris Anderson is the editor-in-chief of Wired magazine. He's also a best selling author several times over and an successful entrepreneur to boot. His most recent work is Makers: The New Industrial Revolution, which delves into the growing trend of open-source manufacturing and its potential implications for a host of industries.

Getting the wheels turning
However, in my talk with Chris, he also shared opinions on areas of opportunities for tech investors outside stocks closely tied to the Maker movement (a la, say, a 3D Systems), which I published in yesterday's piece. This excerpt in particular got me thinking:

Of course, this is no new insight. The rise of smartphones and tablets has been well documented for some time now. However, that's not to say this trend's best days are now behind it.

Oh, Snap(Dragon)!
The investing style mandate I have for my Fool.com real-money portfolio is "defensive value investing." To me, that means I should buy stocks that are (a) observably cheap and (b) offer highly attractive risk/reward profiles, which I believe I've found in semiconductor powerhouse Qualcomm (NAS: QCOM) .

Investors might balk at its current earnings multiple of 20. The S&P 500 currently trades at a hair under 15.5, making Qualcomm seem pricey. I've been a huge fan of Qualcomm's business model for some time now, and I'm convinced there are few other plays on the market more intimately tied to the explosion of mobile device sales, especially at such reasonable valuations.

For those unfamiliar, Qualcomm's business model its twofold. Its core competency stems from its expertise as a code division multiple access (more commonly referred to as CDMA) developer. This is one of two core standards any mobile device uses to connect to the Internet (think smartphones, tablets, and the like). The company has since pivoted this proficiency into the semiconductor market, where it designs and manufactures chips that allow mobile devices to access wireless networks . It generates the lion's share of its revenue from this segment, which goes by the title "CDMA technologies."

And as you could probably expect, business has been booming for Qualcomm here. Revenues have grown a cool 130% since fiscal 2007 to total $12.1 billion over the past 12 months. The company sells baseband component chips to virtually every device maker around, including as the sole supplier to popular names such as the Apple (NAS: AAPL) iPhone and iPad lines and Nokia's (NYS: NOK) Lumia smartphone suite, among others. It also manufactures several other semiconductor lines, including its mobile SOCs under the SnapDragon brand name.

However, Qualcomm's technology licensing segment is the real crown jewel of its business model. In playing its part in developing large parts of the 3G CDMA standard, Qualcomm patented much of the intellectual property that coincided with its efforts. As a result, handset makers that wish to have their devices access mobile networks using 3G CDMA standards have to pay Qualcomm for the right to do so. They've negotiated royalty deals with handset makers that typically range between 3% and 5% of the overall cost of a handset.

Better yet, this licensing revenue is extremely high-margin, since there is no cost of goods sold associated with it. Over the past 12 months, this segment produced an absurdly high 88% pre-tax profit margin. So between these two segments, Qualcomm finds itself beautifully positioned to further thrive as mobile devices gain greater ubiquity.

Of course, the smartphone and tablet markets still aren't anywhere near saturation. Through 2016, the market for such devices is set to grow at a compounded rate of 24% annually. In absolute terms, this equates to a jaw-dropping 5 billion device sales over the period.

The point is that Qualcomm lies at the epicenter of one of the most important trends in technology this decade. Since it's a large company, investors can't expect the breakneck growth that found with smaller companies in the tech industry. However, on a risk-adjusted basis, Qualcomm looks like a resounding buy to me, which is why I'll be happily adding $630 worth of its shares to my real-money portfolio tomorrow.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and, more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

The article Why I'm Buying Into This Major Mobile Play originally appeared on Fool.com.

Andrew Tonner owns shares of Apple. Follow Andrew and all his writing on Twitter, @AndrewTonner. The Motley Fool owns shares of Apple, Intel, and Qualcomm. Motley Fool newsletter services recommend Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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