How to Profit from the Biggest Wireless Spending Boom Since the Invention of the Cellphone

By William Patalon III, Executive Editor, Money Morning

4G Long-Term Evolution (LTE) – called “4G Lite” by the techno-wizards – is shaping up as the hottest thing to hit the wireless business since, well, since cellphones were invented.

This is the new standard in wireless, ending the five-year run of 3.5G as the dominant category in infrastructure spending.

But there’s one problem: 4G Lite is heavy on power.

The snazzy displays and broadband processing that make smartphones, tablets and Apple Inc. (Nasdaq: AAPL) iPads so much fun are also vampiric on batteries. While a 3G-format phone might hold a charge for a full day or even days, heavy-using consumers and busy business folks are finding that a 4G handset that’s fully charged in the morning won’t even last through the afternoon before it’s out of juice.

“By 4 o'clock, I have to charge it," New York attorney Bita Goldman recently groused to The Wall Street Journal, noting that the $55 extended-life battery made the phone too bulky.

Several companies believe they have a solution to the battery-draining problem. But only one will carry the day. And when the uniform switch to 4G LTE ramps up, starting this year, the technology could be worth billions.

With roughly six billion mobile subscribers dialing in from around the world, this crucial “fix” could turn into the tech-sector’s version of an oil gusher – one of the biggest profit bonanzas you’ll see in your lifetime.

Let me give you a little background to “set the stage.”

A “Stunning” Climb

Spending on 4G got started in 2007, and is quickly ramping up.

From a worldwide expenditure of $8.7 billion this year, 4G Lite outlays by wireless carriers will spike to a projected $24.3 billion in 2013 and keep on rising, until they reach $36.1 billion in 2015, says market intelligence firm IHS iSupply Research.

There’s a reason carriers are making this mega-billion-dollar bet on 4G: They see it as the next big revenue driver for an industry that’s always looking for that next big thing.

For one thing, it offers a vast improvement in speed.

You see, 4G requires less bandwidth to deliver data than 3G. That leaves more room for users to download videos, music, TV shows or even movies. More room equates to faster download speeds. And faster download speeds should, theoretically, accelerate data use – inducing customers to step into higher-sticker-priced service plans.

What’s more, wireless is no longer just a game involving “phones.” Apple’s innovation has opened the door for the iPad and for other brands of tablets, the newest of which are also 4G-capable.

But there’s that whole battery-life bummer.

And, as problems go, it’s a big one.

Flawed Technology, Angry Customers

For a real-world example of what I’m talking about, just ask David Jacobs, a 25-year-old digital-advertising employee who lives in Los Angeles.

According to a Feb. 6 report in The Journal, Jacobs recently bought a $300 Samsung Electronics Co. Galaxy Nexus smartphone from Verizon Wireless. The reason: He wanted the fast 4G connection that had been the gadget’s chief selling point.

But just days after he made the purchase, an irritated Jacobs switched off the 4G service.
The issue? You guessed it – lousy battery life.

There are several forces at work here, and all of them are bad for the battery technology now in use.

Part of the problem is that, even though carriers like Verizon are pushing 4G to subscribers, the actual service and infrastructure is being rolled out on a city-by-city basis – meaning 4G isn’t yet ubiquitous like its 3G counterpart. The upshot is that the 4G phones must continue sending out their signals, in an ongoing search for a 4G tower. And that hastens the battery drain.

Then there’s the battery technology itself. It just hasn’t kept pace with the advances made in smartphones.

The new, enhanced display screens draw several times more power than their predecessors. The enhanced features and capabilities of the newest phones are made possible by higher processing speeds and more-robust operating software. And many of the applications run continuously in the background, so they’re a constant drain on battery power.

All of this is murder on batteries. Their technology has improved at a lackluster rate of only about 1% a year.

Needless to say, new batteries are being developed.

But there’s another innovation – one that promises a more-immediate and longer-lasting impact.
I’m talking about new microchips that can make smartphones even smarter and more efficient – and, in doing so, extend 4G battery life. Two chip companies, in particular, have developed a silver-bullet solution to 4G’s draining effect on batteries. Those two are:

But today, one has emerged as a clear leader.

And that’s Qualcomm.

Let’s take a look.

An Industry Leader – On Multiple Fronts

Qualcomm Inc. (Nasdaq: QCOM), recent price $67.50: At the massive World Mobile Congress event in Barcelona in late February, the digital heavyweight introduced its “MSM8960 Snapdragon S4 chipset.” This chipset – a “dual-core” processor with an integrated 4G LTE chipset – would start appearing in smartphones very soon, Qualcomm noted.

This approach lets the radio and “apps” processor share resources – an innovation that directly attacks the battery-drain issue I described above.

Raj Talluri, the company’s vice president of product management, told a Mobile World Congress audience that “all of the LTE devices out there today use separate modems and use separate radios. With integrated LTE, we’ll see significant improvements in power efficiency.”

Objective testing confirms the company’s assertion. Even though the handset is only dual-core, benchmark tests from AnandTech concluded that, compared with a standard Galaxy Nexus smartphone, the Qualcomm chip doubled the speeds of its processors and shaved a hefty 1.4 seconds off page-load times.

Commercial handsets and tablets with the 8960 chipsets won’t start shipping until fall, but that means Qualcomm will have to begin shipping them to the device manufacturers much sooner.

Industry speculation now has Qualcomm working on a “quad-core” version, which industry insiders believe the company is referring to internally as the “S8.”

Big Company, Big Potential Upside

Given its market cap of $114 billion, I grant you that Qualcomm is a big company. But you have to like the fact that it is capitalizing on a number of cutting-edge trends – in addition to the LTE chipset.

For instance, consider the company’s code division multiple access (CDMA) technology – a channel-access capability that’s central to radio-communication technologies. The technology is a global standard and is well-protected by Qualcomm’s patents.

Better still: Qualcomm is the sole supplier of baseband chips for the Apple iPhone 4S.

But Qualcomm’s management is also shrewdly playing the field – the company has hooked up with Nokia AG (NYSE ADR: NOK) and Microsoft Corp. (Nasdaq: MSFT). Both partnerships have given it a solid beachhead in both India and China.

At the end of March, in fact, Nokia and China Telecom Corp. Ltd. (NYSE ADR: CHA launched the Lumia 800C and Lumia 610C wireless phones in China. The Qualcomm-powered CDMA version of both smartphones will be available for purchase in Nokia stores and through other retailers in that Asian nation. Indeed, the 800C is Nokia’s first CDMA phone that uses the Microsoft Windows Phone operating system.

China Telecom Chairman Wang Xiaochu said that the “grand launch for China's first CDMA Windows Phone represents our optimism and excitement for the future of Windows Phone and Nokia Lumia in China.”

And this is just a snapshot of everything Qualcomm is doing. Given what we’ve seen, however, it’s no surprise the company continues to grow at a spirited clip. For the fiscal year that ends in September, the company is looking at revenue of between $18.7 billion and $19.7 billion – which would be an increase of 25% to 32% from the year before.

That means the company’s current Price/Earnings (P/E) ratio of 23 isn’t at all out of whack with the pace of business growth Qualcomm is seeing.

Wall Street ratings on the stock are mixed: While there are a number of “Buy” ratings, there are also “Holds” and even “Sells.” Of course, that leaves a lot of room for the welcome ratings upgrades that can push shares higher.

The highest 12-month target price on Qualcomm shares is $85 – which is 32% higher than the market price when this report was published. The stock features a 1.27% dividend yield.

The company recently announced a 16% increase in its dividend – and a $4 billion share buyback.
That’s a signal that even the company itself is bullish on its own prospects.