Qualcomm Incorporated (O:QCOM) is caught in the midst of some unfavorable news in the last one year period. That has resulted in the stock taking a loss of more than 30%. As a result, the stock potentially has become a mispriced one. Despite unfavorable sentiments, its quarterly numbers topped expectations convincingly. The company has also been roping in fresh clients to fill the void created by the exit of a few. While the industry associated weakness might be seen, there is also a way to buck the trend or outperform the industry to reap better gains. Unfortunately, the market’s focus has been mostly on negative sentiments and failed to look at the favorable factors, but that can potentially provide better opportunity.
Tactical Review Is A Good Thing
Recently QUALCOMM’s board, as well as management, conducted a review of its structure. It was decided that the existing structure would be able to make it easy to provide incentive to growth. The ultimate objective is to add more value to its shareholders. According to its plan, there would be a value addition of approximately $1.40 billion by slashing spending apart from the alignment of the Directors’ compensation, which will be in line with the performance of the company. The execution of this strategy will undoubtedly enhance the efficiency level of the company, particularly in costs. Therefore, any additional value coming in, be it savings or otherwise, will optimize the wealth of the shareholders.
One of the negative factors that affected QUALCOMM was the purported poor performance of its Snapdragon 810. The product had a very negative perception in the market with issues with overheating. However, it was a fact that the chip still won a place in the majority of smartphone designs. Still, the company has advanced to the Snapdragon 820, which appears to be doing better in the market. During a recent conference call, management claimed that the chip has already won more than 100 designs. Though it would not have any impact immediately, i.e. in the first quarter of the current calendar year, its material impact can be seen from the second quarter. That meant more revenues are likely to be seen from Snapdragon 820.
Asian Market Is Key
China is the biggest contributor to QUALCOMM. Aside from that, there are also emerging markets such as India. The company indicated its intention of investing in Indian startups by pushing $150 million into it. The objective is to gain from the Asia-Pacific market. Also, the growth of smartphone is rapid in India though dominated by cheap models. However, that is also a favorable factor since the replacement cycle will be much quicker than the branded expensive one which will have extended life than the cheaper variety. Researchers have already indicated that India would be one among the top four nations with higher smartphone penetration levels in the coming years.
There were, at least, two reports that give prominence to the Asian markets, which would give QUALCOMM enough room to gain. For instance, Cisco Systems (O:CSCO) has released a report on the mobile users trends, which will be a significant factor to fuel revenue growth. The network switch maker said that future mobile data traffic would witness a compound annual growth pace of 4.3% until the year 2019. Most important from the research was that a big part of it will come from the mobile users of Asia-Pacific region. Another factor was that usage of mobile data on a per-month basis would record a CAGR of 51% until it touches 2.8 GB a month during the same period. That meant replacement of chips to manage the speed would contribute to additional revenue growth. The highest growth will be experienced by Central, as well as, Eastern Europe, and the Middle East and Africa. Latin America and Asia-Pacific will follow suit.
Similarly, Ericsson (O:ERIC) published a report on mobility indicating that subscription growth would be 5% CAGR between the years 2014 and 2020. This should favor QUALCOMM’s quest for additional revenue. Its contention was that growth in LTE subscriptions would be the driving force. The company’s report also suggested that mobile data traffic at the global level would record 45% CAGR in the same period. The key factor is that China would continue its dominance in the LTE subscriptions to reach 1.1 billion by the end of the year 2020. This is one area can count upon to add revenue.
LTE Growth
One of the areas that QUALCOMM will be looking to gain is LTE market. The company depends on this market for considerable part of incremental revenue. China will be the major market for LTE subscriptions, where the company generates half of its total revenue. In 2014, LTE shipments witnessed 33.9% growth while it is predicted to witness 46.2% growth in the current calendar year. The LTE shipments are estimated to grow 45.2% next year. This will change the valuation of the company. In fact, it was for this reason that most of the analysts have a price target of above $60.
Conclusion
Most of the recent losses were due to exaggerated fears like the one-time fine slapped by China regulator and economic weakness in China. The stock lost about 34% last year and that itself provides an opportunity to buy. One of the favorable factors for the company was its dependence on Asia and incidentally that is where most of the growth will come in the next few years. Therefore, if QUALCOMM could not gain, then it would be tough for others to manage without the significant presence in the Asian market. Whatever concerns expressed by a section was at an exaggerated level. Therefore, one can keep faith in the stock. Its price to earnings ratio is cheaper than the industry and the S&P 500.