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Bull Of The Day: Qualcomm (QCOM)

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After a fantastic Q3 earnings season, chipmakers are back in the limelight. The semiconductor industry has illustrated significant gains since the beginning of October, with the iShare Semiconductor ETF (SOXX - Free Report) up over 12%.

The world’s largest chip players, Intel (INTC - Free Report) and TSMC (TSM - Free Report) , have finally thrust their toplines back into growth after the cyclical downturn the sector had been experiencing for the past year or so. These chip powerhouses are driving the whole industry towards new highs.

Wireless chip producing leader Qualcomm (QCOM - Free Report) has surged over 20% since the beginning of October, and this is attributed to more than just a sector rally.

Qualcomm’s September quarter (fiscal Q4) earnings were released last week, and the markets were very excited about a top and bottom-line beat. The firm also guided higher for its December quarter (fiscal Q1) as smartphone demand begins to return with holiday shopping being a key catalyst.

Qualcomm’s Primary Drivers

Qualcomm is the largest supplier of mobile chips helping to support smartphones and the internet of things (IoT) devices. The firm has 3 primary segments:

QTC: supplies wireless chips and software to consumers for devices like smartphones, tablets, laptops, and other wireless devices.

QTL: this segment holds an extensive portfolio of intellectual property that the company allows other enterprises to use by paying them a licensing fee.

QSI: this is the firm’s strategic investment unit. The Qualcomm Ventures arm keeps the firm’s eye on the future, always looking for new opportunities and the next groundbreaking technologies.

Qualcomm’s primary profit driver is derived from licensing (QTL). The firm is an innovative machine that creates state of the art technology, patents it, and then sells the technology through licensing. This gives them a consistent revenue with very little operational overhead. The company commits about 20% of its annual revenue to R&D to continue pushing out cutting edge technology.

The company has recently resolved licensing disputes with Apple (AAPL) and Samsung, though they are still in negotiations with Huawei. Qualcomm is well-positioned for the next wave of mobile technology to propel the smartphone industry back into growth.

The Next Big Thing

5G is the next big thing for wireless technology and expected to drive this business back to robust double-digit growth. 5G is going to start a resurgence in not just smartphone sales but sales in IoT devices like smartwatches, tablets, and other wireless devices. This is all good news for Qualcomm as it will be the technology powering a lot of these.

Qualcomm’s CEO Steven Mollenkopf said that its 5G technology is now expected to be in 230 devices, which is up 47% from the figure quoted last quarter of 150 devices.

Take Away

Qualcomm is an innovations machine that has a diverse portfolio of wireless capabilities that are a necessity in the tech market today. They are well-positioned for the 5G revolution, and I expect this stock to take off once 5G is fully unveiled. Analysts are increasingly optimistic about the future profitability of this firm, propelling this stock into a Zacks Rank #1 (Strong Buy).

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