The NASDAQ has finished up 11 of the last 12 weeks, proving that TECH IS HOT in this market rally. It’s no hidden secret that semiconductors are cyclical and should rebound with the economy. However, timing the market to buy at the bottom is a difficult task for any investor. QUALCOMM, Inc. (QCOM) is a great semiconductor play on the secular growth of smartphones and wireless network upgrades from 2G to 3G, and eventually to 4G. QCOM manufactures code-division multiple access (CDMA) based integrated circuits and system software used in mobile phones, data cards and infrastructure equipment. They also license over 10,100 U.S. granted and pending patents for CDMA and related wireless technology to more than 150 third party wireless equipment and cell phone makers. QCOM continues to see royalties ranging from $4 to $8 for the sale of each 3G phone.
On April 27th, QUALCOMM reported revenues of $2.46 billion, beating analysts’ estimates of $2.33 billion. However, the big news was $891 million will be paid to Broadcom (BRCM) from a litigation settlement charge over the next four years. However, this will save QCOM $100 million in annual operating expenses as well as pay off the litigation charge with offshore cash, thus saving QCOM about 25% instead of repatriating that cash as profits as well as $100 million annually in operating expenses. This ongoing legal battle has hindered QCOM’s performance and distracted management, but with these issues now behind them, I believe QCOM will outperform the broader semiconductor market in the near future.
Semiconductor Snapback
Record high inventory levels in semiconductors have been decreasing over the past two months due to a snapback in demand, evident as channel inventories have been compressing. According to the Wall Street Journal on April 26th, memory chips comprise 14% of the overall broader semiconductor industry but often are a leading indicator for the sector due to their commodity-like status as widely used products that are hard to differentiate. Their downturn that began in early 2007, foreshadowed last year’s broader industry fallout. However, the two biggest memory chip makers, Samsung and Hynix, have reported smaller chip losses while Intel (INTC) and Texas Instruments (TXN) have beat expectations in microprocessors and digital signal processors, respectively.
