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Qualcomm: Wireless Bargain
03/18/2015 7:00 am EST
Our latest featured stock manufactures and markets digital wireless telecom products and services based on CDMA technology for wireless voice and data communications, notes J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.
Qualcomm (QCOM) also licenses many of its 5,700+ patents and intellectual property to manufacturers of wireless equipment.
Qualcomm’s integrated circuit chipset, called Snapdragon, helps power the iPhone 5 and Android-based smartphones. Its technology is also used extensively in notebook and tablet computers.
Qualcomm continues to benefit from the rapid growth of 3G (third generation or Tri-Brand 3G) wireless technologies and smartphones in emerging markets, including China.
The next-generation super-fast 4G Long-Term Evolution (LTE) technology will be quickly adopted in many parts of the world. Qualcomm is now the leading provider of LTE technology.
A regulatory investigation by the Chinese government has finally ended in a settlement. Qualcomm will pay a fine of $977 million.
The company will continue to charge royalty rates of 5% for 3G devices and 3.5% for 4G devices. However, the royalty base on which royalties are charged will fall from 100% of the net sale price to 65%.
Qualcomm will now be able to go after Chinese mobile device makers who owe the company royalties, after they refused to pay royalties until the case was settled. The settlement is fair and will likely lift a cloud over Qualcomm’s stock price.
Potential growth in 2015 is significant. There are seven billion cellular connections in the world and two-thirds are 2G. This provides Qualcomm with substantial potential to upgrade systems to 3G or 4G technology.
At 13.9 times current EPS, QCOM shares are a bargain. The balance sheet is very solid with no debt and lots of cash targeted to fund research and expansion. I expect QCOM to reach my minimum sell price target of $95.45 within one year.
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