Just as we’re about to celebrate what I consider the seventh anniversary of the smartphone – Apple Inc. (NasdaqGS: AAPL) launched the iPhone on June 29, 2007 – there’s no shortage of “experts” who will tell you the category is already dead.
Ever since, about a year ago, Samsung and Apple began warning of a slowdown in smartphone growth, the gloom-and-doomers have been writing eulogies for the seemingly ubiquitous product.
For instance, Investor’s Business Daily recently said the market is “maturing” – concluding that formerly special devices like the iPhone and the Samsung Galaxy have reached “commodity” status.
Just a few months ago, TheStreet.com said the market is “rapidly losing its growth,” and predicted an even-more-drastic slowdown to come because of the sputtering Western Europe economy.
And earlier this year, market research firm IDC predicted a slowdown in worldwide smartphone shipments.
These predictions are way off target.
And I can prove it.
The experts study the smartphone-wielding crowds in cafés, airport terminals, sporting events, hotel lobbies and even supermarkets here in the United States, and conclude the market has reached the saturation point.
That’s not actually the case.
Besides, there are huge swaths of the world where most folks have yet to even hold a smartphone, let alone own one.
And this means there’s still a huge opportunity for global sales.
The IDC report I just mentioned actually shows this. The market-researcher estimates that smartphones sales hit roughly 1 billion units for the first time last year. And by 2018, it is projecting worldwide sales will zoom to 1.7 billion devices.
We’re talking about a market that’s going to zoom 70% in just five years.
And we’ve just identified the biggest beneficiary.
It’s a tech leader – a company that has a stranglehold lead on a smartphone component that will make this growth possible. And it just keeps adding to its product offerings and bolstering its technology to maintain its lead and keep its challengers in the rear-view mirror.
Technically speaking, there were “smartphones” that hit the market before the iPhone, particularly in tech-crazy Japan. But those not-so-smart phones were held back by a lack of features and clunky software.
From the time of its 2007 debut, however, it was clear that the iPhone was a truly integrated platform. It could text, make phone calls, surf the Web and play music – all in a user-friendly touch-screen format.
Since then, smartphone-sector sales have soared – a trend that will continue at least through the end of this decade.
That’s why tech investors would do well to take a look at Qualcomm Inc. (NasdaqGS: QCOM). The big-cap firm helped pioneer wireless communications and is perfectly poised to benefit from continued smartphone adoption around the world.
In fact, continued smartphone adoption is a key part of Qualcomm’s growth strategy.
The heart of the company’s smartphone franchise lies in its Snapdragon processor, a device that combines multiple functions in a single chipset the size of a standard semiconductor.
Qualcomm built Snapdragon to support the smartphone as a true all-in-one device — a phone, Web browser, digital and video camera, music player, gaming station and high-def video screen.
Snapdragon is heavily focused on phones using Google’s Android operating system from Google Inc., which accounts for nearly three-fourths of all smartphones sold today.
The San Diego-based company, obviously, is not on the smartphone death watch.
You see, this company doesn’t have to worry about tussling for market share with Apple, Samsung, Google Inc. (NasdaqGS: GOOG), and now Microsoft Corp. after its recent acquisition of Nokia‘s handset unit.
That’s because this tech champion makes the guts of numerous manufacturers’ phones and, therefore, isn’t vulnerable to the whims of the mainstream marketplace’s fashions and trends.
Qualcomm expects to see a global total of 7 billion smartphones in use by the end of 2017. By then, this world leader in wireless semiconductor sales expects smartphones to account for 80% of handset sales, compared with roughly 55% last year.
Additionally, Qualcomm is the world’s largest “fabless” semiconductor firm. That means it concentrates on product design and contracts other firms to make the chips, a process that frees up cash flow and improves operating margins.
Meanwhile, Qualcomm sees the growing use of Wi-Fi connections as a key part of the growth of tablets and smartphones. So, in 2011 it agreed to buy Wi-Fi chip maker Atheros for $3.1 billion.
The purchase ranks as the largest acquisition in the company’s 29-year history. It was a savvy move for Qualcomm because it allows the company to benefit from smartphone growth in two different ways: It now sells the chipsets that go into the Wi-Fi gear and it sells the chips that go into the smartphones that connect to the Wi-Fi networks.
Such savvy strategies will translate into growth for the company – and profits for you.
Five Pathways to Wealth
With a market cap of $135 billion, QCOM trades at $80 a share. So far this year, it has more than doubled the overall market’s returns, 9% for Qualcomm compared to 3.5% for the Standard & Poor’s 500 Index.
I believe it will continue to outperform the market and make money for investors savvy enough to look beyond shortsighted pundits’ quick-trigger proclamations of the death of the smartphone.
And now I’m going to show you how by running it through the five “filters” that make up my tech investing strategy. Let’s take a look…
Rule No. 1 – Great Companies Have Great Operations: I look for excellent leaders who know how to build top-notch franchises. Though just named CEO in early March, Steve Mollenkopf has played a major role in making Qualcomm a global leader in the Mobile Revolution.
A 20-year company veteran, Mollenkopf previously served as chief operating officer. In that role, he helped make the firm the world leader in wireless chipsets and spearheaded the Atheros acquisition. Besides being a leader, he’s also a tech guy who holds seven wireless patents.
Rule No. 2 – Separate the Signal From the Noise: To create real wealth you have to ignore Wall Street’s hype machine and focus on firms with excellent fundamentals.
That’s clearly the case here. With a market cap of roughly $135 billion, Qualcomm has 29% operating margins and a return on stockholders’ equity of 17%. It has $16 billion in cash on hand and virtually no debt. Last year, it brought in $6 billion in free cash flow.
Rule No. 3 – Ride the Unstoppable Trends: The best opportunities to achieve life-changing gains come from sectors that will remain red hot over the long term.
Smartphones as fully integrated devices only really got started seven years ago. But by 2018, we’ll be seeing 1.7 billion of them sold per year. The trend is just getting started in developing nations such as China and India, which have a combined 2.5 billion people.
Rule No. 4 – Focus on Growth: Companies that have the strongest growth rates almost always offer the highest stock returns. Over the past four fiscal years, Qualcomm has grown its sales at a 35% compound annual rate. At that rate, sales will double in less than two years.
During the same period, the company grew its pretax earnings at a rate of 27% a year, meaning that in 2.5 years they could roughly double. And the company is targeting other growth areas beyond mobile, including wearable tech, the connected car, and the Internet of Everything.
Rule No. 5 – Target Stocks That Can Double Your Money: This is where we look at Qualcomm’s earnings growth and see how long it will take the firm to double profits. By doing that, we can figure out how long it should take the stock to roughly double in price.
I’ve examined the firm’s financials in detail and am projecting that earnings per share could grow by as much as 15% a year over the next five years. Now we use what I call my doubling calculator. Mathematicians call it the Rule of 72. By dividing 72 by 15 we find that it should take about 4.8 years for profits – and the value of our investment – to double.
That makes Qualcomm a great play in a choppy market where investors are looking for more “defensive” positions. We’re looking for stocks with steady double-digit growth that also pay a dividend. And with Qualcomm, we get a proven long-term winner and a current yield of 2.1%.
Now then, the stock came under pressure in late April when the firm said it may face Securities and Exchange Commission (SEC) enforcement proceedings stemming from allegations of bribery in China. And earlier this month, the SEC charged three former Qualcomm managers with insider trading stemming from the company’s acquisition of Atheros.
Qualcomm quickly fired those managers and says it’s cooperating with the federal authorities. As well, it denies the bribery charges, and I don’t see the company taking a major hit to earnings from these controversies.
Instead, I see it as a great chance for you to acquire a proven leader at a discount. We’re looking at firm here that is a clear leader in the mobile revolution – one of the biggest trends in tech today.
And this is a cash-rich company that offers stable long term growth. The company has about $16 billion in net cash on hand. That works out to about $9.85 a share — a hefty 12% of its share price. That gives the company some nice maneuvering room, and also will act as a bit of a cushion in case of a temporary downturn in stock prices.
The bottom line: Qualcomm is the kind of “foundational play” that can anchor your portfolio, even as it gives you some predictable growth in the years to come.
In addition to the highflyers that can make you a stack of money fast, stocks like this are just what you need to steadily build your net worth. They should be a part of every tech investor’s portfolio.
And Qualcomm is a great one to add – while Wall Street and the other experts are eulogizing the smartphone-sector’s demise.
Have a great weekend.