Billionaire Bought This Under-the-Radar Chip Stock

At one time, Al Gore’s fund, Generation Investment Management, had so much conviction in Qualcomm that they bet around half a billion dollars on it.

Today, another huge investment fund founded by billionaire David Tepper has a stake in the chipmaker. What is it that these money managers see in the San Diego-headquartered firm to persuade them to risk hundreds of millions of dollars?

Key Points

• Qualcomm generates a substantial portion of its revenues from licensing its patent portfolio, which in turn produces financials with higher margins.
• The company has branched out from supplying chips to smartphone makers to include automotive and smart devices.
• The semi stock tends to trade with much lower volatility than many of its peers and pays a modest dividend to appeal to conservative investors.

Why Qualcomm Is Different

Among semiconductor stocks Nvidia grabs the most headlines because of its monumental share price movements and top line growth but Qualcomm has earned respect among technology investors for a whole other reason. While most semi stocks rely almost solely on chip sales to drive revenues, Qualcomm has a whole other stream of income that stems from licensing its massive patent portfolio.

The benefit Qualcomm derives from its patents are numerous. For one, they act as a defense against competitors aiming to dislodge it. But critically they enable the company to generate higher margins than would be possible from chip sales alone.

Revenue Mix Is Broadening

If there were a drawback in Qualcomm’s model it was its high reliance on smartphone makers but over the years management has increasingly branched out and targeted other industries, including makers of smart devices and car manufacturers. That revenue diversification makes a more compelling case for investors to stick with Qualcomm over the long-term, but it’s not the only reason to like it.

Key to the firm’s success is its massive profits that enable it to heavily invest in R&D so it can sustained its technology lead.  Over the past twelve months alone, Qualcomm reported $8.6 billion in earnings before interest and taxes. It’s little wonder it trades at a $169 billion market capitalization.

With that said, the company’s price-to-earnings ratio of 23x is elevated and according to analysts it’s trading pretty close to fair value of around $150 per share at this time.

Is Qualcomm a Buy?

If you were to analyze Qualcomm solely on its cash flows at this time, it’s hard to justify that the margin of safety is high. Similarly, technical indicators suggests it may be due a pullback.

So, while Qualcomm isn’t a slam dunk value play at this time, it is well worth adding to a watchlist for when it does pull back. For those who cannot wait to pull the trigger, the 2% dividend yield offers a buffer and long-term passive income opportunity given the firm’s 20+ year streak of increasing it and rewarding shareholders.

Lastly, the share price volatility Qualcomm exhibits has historically been muted so if you’re a conservative investor looking for a slow and steady stock with a fortress business model, it’s hard to find a better chipmaker.