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Buy Qualcomm, a major beneficiary of the Apple/Samsung phone wars
10/16/2012 11:30 am EST
Nope, not the end of Moore’s Law. And certainly not a plunge in unit sales of the phones, tables, PCs, and other devices that rely on chips.
No, the worry is that savage competition among device makers who need to make their products ever smaller and ever cheaper will crush margins at their suppliers. If you’re an Amazon.com (AMZN) fighting off Google (GOOG) and Apple (AAPL) and Samsung in the tablet market, don’t you think you put all the pressure you can on your suppliers to bring their prices down and then down some more?
Which is why the Apple iPhone and the Samsung S3 are, collectively, such good news for the chipmakers that sell into the cell phone market. Because of these two companies the $400 a phone (without a contract) market is on fire with unit sales expected to hit 275 million in 2012 from 188 million in 2011 (46% growth) and then to grow to $332 million units (21% growth) in 2013, according to Credit Suisse. And because $400 phones compete on speed and features and design—and not on price--neither Apple or Samsung is driven to wring the last penny out of their suppliers. The result is that Wall Street analysts, who were writing horror stories about a collapse in ASPs (average selling prices) just a few months ago, are hard at work revising their forecasts for the industry as a whole (that includes feature phones and smart phones) to account now for only a modest drop in average selling price of about 1% to 3%. At the upper smart-phone-only end analysts are now actually calling for an increase in average selling price. Looking at a blended selling price for smart phone devices Credit Suisse, for example, sees ASPs climbing to $241 in 2013 from $220 in 2012.
For Qualcomm that means, according to Standard & Poor’s, a decline in gross margins to 63% in 2012 from 64.8% in 2011 as rising volumes of chip sales dilutes the company’s royalty payments. (Qualcomm collects royalties on its patents from phone makers and since that doesn’t require any manufacturing or any raw materials, the royalty payments carry extremely high profit margins.) But Standard & Poor’s projects that gross margins will climb back to 63.9% in 2013 and 64.1% in 2014.
Certainly nothing here to suggest a margin squeeze.
And it looks like the shortage of 28-nanometer-circuit size manufacturing capacity that dinged sales volumes in the July quarter should be a non-issue by the December quarter. The company issued what I’d call very modest guidance for the September quarter and stands a good chance of surprising to the upside in both the September quarter (scheduled to report on November 7) and the December quarter. Wall Street analysts are looking for year-over-year earnings growth of just 3.82% and 5.41% in those two quarters, respectively.
I added this stock to my Jubak’s Picks portfolio on Friday, October 12 in my post http://jubakpicks.com/2012/10/12/profits-from-the-iphone-flow-to-more-stocks-than-just-apple-here-are-five-that-could-outperform-even-the-mother-ship/
I calculate a 12-month target price of $73 a share.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Qualcomm as of the end of June but it did own shares of Apple as of the end of that quarter. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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