October was not the kindest month for technology stocks. Led by approximate 10% declines in tech stalwarts Apple (AAPL) and Google (GOOG), the sector lagged the overall market by about 4% for the month (see the chart below). Some of the key challenges across the industry are the migration from PCs to mobile devices and the problems in Europe, which account for about 25% of overall technology sales. Although I believe these challenges will continue to be present over the coming months, I have used the selloff in the sector to add to some of my core holdings, including EMC (EMC), which I wrote about recently, and Qualcomm (QCOM). QCOM is not as sexy a pick as Apple or Google, but it offers more clarity and consistency right now.
Unlike either Apple or Google, Qualcomm's earnings estimates for fiscal 2012 and fiscal 2013 have not been taken down significantly over the past few months. In fact, they have edged up a tick over the past two months. In addition, the company does not have wild swings around earnings periods. It has beaten estimates for 11 out of the last 12 quarters. Apple and Google tend to beat or miss significantly on their earnings reports.
I also like that Qualcomm supplies its products and gets its license revenue from a variety of different manufacturers. This diversifies its risk and makes it non-reliant on the success on any specific product line or manufacturer.
Finally, unlike Google, the company is not facing the increasingly focused regulatory scrutiny domestically and in Europe. Nor does Qualcomm have to struggle to figure how to "monetize" the migration to mobile. Unlike Apple, investors and analysts are not asking whether it has lost its "mojo" or is lacking the "vision" it had when Steve Jobs was the CEO.
Four additional reasons QCOM is a solid buy at $59 a share:
- The company has consistently showed double-digit revenue growth, a desirable trait in this slow growth economy. Qualcomm has grown sales at an average 10.5% annual clip over the past five years. The company is on track for over a 25% revenue gain this fiscal year and analysts expect better than 14% growth in fiscal 2013.
- QCOM is offering this steady sales growth for just 14.5x forward earnings, a discount of to its five-year average (17.9).
- The stock is selling near the bottom of its five-year valuation based on P/E, P/CF and P/B. It also has a strong balance sheet, which includes approximately $12 billion in net cash on the books and pays a dividend of 1.7%.
- The median price target by the 42 analysts who cover the stock is $72 a share. Standard & Poor's has given the stock its highest rating, Strong Buy and an $82 price target.