Qualcomm (QCOM): Investing in 3G

"Qualcomm (NASDAQ: QCOM) is a play on the growth of the 3G smartphone industry," says growth stock expert Paul Tracy.

In his always-fascinating StreetAuthority Market Advisor, he explains, "QCOM owns the dominant 3G technology and stands to benefit from the coming wave of 3G smartphone handset introductions."

"Qualcomm sells semiconductor chips and licenses products based on a technology known as code division multiple access (CDMA). CDMA is a cell-phone technology that enables 3G cellular telecom services. The chips and components QCOM sells are found in these 3G mobile phones.

"There are two main competing standards for mobile telephone networks: Global System for Mobile communications (GSM) and CDMA. CDMA is superior to GSM in terms of allowing high-speed data transfer; it is easier to build a high-speed third-generation data network around CDMA technology.

"Currently, about two-thirds of 3G networks are still based on GSM, but that is expected to change over the next few years as more providers adopt CDMA; most analysts concur that CDMA will be the dominant technology by 2010.

"Several major handset manufacturers are planning to roll out 3G phones in the second half of 2008 based on 3G CDMA technology. The list includes a new advanced BlackBerry smartphone to be called "Bold," the new 3G Apple iPhone and Finnish handset giant Nokia's (NYSE: NOK) new "Tube" phone.

"Smartphone users will want to purchase these new models to take full advantage of the higher data speeds offered by 3G networks.

"Look for a wave of 3G smartphone sales in the latter half of 2008. In fact, that growth may already be happening -- in mid-June QCOM raised its quarterly guidance, citing accelerating sales of 3G phones.

"Qualcomm owns many of the essential patents covering CDMA technology. Therefore, companies wanting to use CDMA must either buy chips directly from QCOM or license the technology from QCOM in exchange for a royalty fee.

"QCOM's royalty revenue stream is extremely high margin. The company typically receives a royalty fee based on the wholesale value of the handsets sold using CDMA technology.

"Thus, QCOM benefits from carrier handset subsidies; these subsidies increase consumers' demand for phones, but do not lower the royalties QCOM receives because its fees are based on the pre-subsidy wholesale cost.

"This is another huge advantage for QCOM; since 3G smartphones tend to be higher-priced handsets, QCOM's royalties rise as more high-cost handsets are introduced.

"Qualcomm trades at 18 times forward earnings, in line with its expected long-term growth rate of +18%. It is unusual for an established growth name like QCOM to trade in line with its long-term growth rate.

"QCOM should see a strong second half of 2008 as new 3G handsets are introduced and smartphones continue to grab share from traditional cell phones.

"In addition, because smartphones are heavily subsidized by carriers, there should be little impact from the slowing U.S. economy and weakening consumer spending since users aren't exposed to the full cost of their purchase.

"QCOM is also one of the most-profitable technology firms around. The company's 36% margins rank QCOM above even technology powerhouses like Microsoft and Apple in terms of margins.  With this in mind, QCOM is a solid 'Buy' under $52 per share."