Top picks from S&P: Qualcomm

This chip maker is capitalizing on rapid smartphone growth.

By TheStockAdvisors May 24, 2013 4:12PM
Circuit Board copyright Datacraft Co Ltd, imagenavi, Getty Images(This post is part of a special report featuring 7 Top Picks from S&P Capital IQ.)

By Jim Moorman, S&P Capital IQ, The Outlook
Sector: Telecommunications Equipment

Qualcomm (QCOM) designs chips and writes software for wireless handsets and infrastructure. The company uses a fabless business model, employing several independent semiconductor foundries to manufacture its products.

It also licenses its technology to other manufacturers. The equipment and services unit, which accounted for about 64% of total sales in the second quarter of fiscal 2013 (September), provides integrated circuits and system software.

About 173 million model-station-modem (MSM) integrated circuits were sold during the second quarter of fiscal 2013, compared to 152 million a year earlier.

Rapid growth in the smartphone market and an improving domestic economy will help to generate solid chipset sales for Qualcomm in the coming year, we believe. We expect the company to benefit on the royalty side as emerging markets convert their wireless networks from 2G to 3G.

The license and royalty fee segment accounted for about 34% of total sales, with 88% operating margins. Qualcomm holds a number of patents related to CDMA wireless technology, and derives royalties from the sale of CDMA-based equipment, including CDMA and WCDMA handsets made by customers Samsung, LG Electronics, Motorola, and others.

We forecast 30% revenue growth for fiscal 2013, 12% in fiscal 2014, and 8% in fiscal 2015, following a 28% increase in fiscal 2012. We believe a strong reception for its high-end chips and increasing penetration of mid-tier handsets throughout fiscal 2013 will drive growth.

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Tags: QCOM
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