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CSI NY: Why Did You Wall Street Boys Declare This Stock Dead?

We're up 15.6% on Qualcomm Inc. (Nasdaq: QCOM) since we recommended in a May 2012 special report about the 4G wireless spending boom.

Add in dividends and you're talking about a total return of better than 18%.

That's not bad – especially given how techs have been savaged of late.

But let's be honest: We want to do better than that for you.

And we believe we can.

In fact, if you're a Qualcomm shareholder, it may be time to buckle your seatbelts, says Michael Robinson, our in-house tech expert and the editor of our Nova-X Report and Radical Technology Profits trading services.

The reason: He's predicting this stock will double in the next four years.

"You know, Bill, I was just thinking about how the smartphone is about to turn seven years old – so it's a birthday, of sorts, for this ubiquitous gadget," Michael told me during a talk last week. "You see, Apple Inc. (Nasdaq: AAPL) introduced the first iPhone back on June 29, 2007, meaning the anniversary is fast approaching. In recent months, I've been seeing reports from all these so-called 'experts' who believe the smartphone sector is essentially DOA (dead-on-arrival). But that couldn't be further from the truth."

In fact, Michael can prove his point.

Tech-market researcher IDC says that annual smartphone sales reached the 1 billion unit threshold for the first time last year. And it predicts annual sales will hit 1.7 billion in 2018.

We're talking about an expansion of 70% in just five years.

In short, the smartphone is far from dead.

And Qualcomm will let us cash in.

Above the Fray

The San Diego-based Qualcomm is a tech leader. It just keeps adding to its product offerings and bolstering its technology to maintain its lead and keep its challengers in the rear-view mirror.

"What I like about Qualcomm, Bill, is that it makes the 'guts' for the phones made by several different smartphone-makers," Michael said. "So while Apple, Samsung Electronics, Google Inc. (Nasdaq: GOOG), and now Microsoft Corp. (Nasdaq: MSFT) – thanks to its recent acquisition of Nokia's handset unit – slug it out in the market, it can sit back and know that it's selling to each of these high-tech pugilists."

By the end of 2017, Qualcomm expects to see 7 billion smartphones in use around the world. By that point, the company expects smartphones to account for 80% of handset sales, compared with roughly 55% last year.

Additionally, Qualcomm is the world's largest "fabless" semiconductor firm. That means it concentrates on product design and contracts other firms to make the chips, a process that frees up cash flow and keeps margins high.

As we've recounted in past briefings, semiconductor fabs are stunningly expensive to build. Current estimates put the cheapest at about $1 billion – but outlays of $3 billion to $4 billion are well within reason. Indeed, a Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE ADR: TSM) fab that opened a year ago was said to carry a price tag of nearly $10 billion.

Those high sticker prices are understandable when you consider just how sophisticated the chip-production process has become. There's a central "clean room" that keeps all dust and particulates out of the microchips. And each fab contains several hundred pieces of equipment – with price tags ranging from just under $1 million to as much as $50 million.

So a fabless firm like Qualcomm that can dodge those outlays will find itself in much better territory, financially speaking.

Qualcomm combines that low-cost mentality with a high-growth focus that's great for profit margins.

For instance, the company views the growing use of Wi-Fi connections as a key part of the growth of tablets and smartphones. That's why, back in 2011, it agreed to buy Wi-Fi chipmaker Atheros for $3.1 billion.

It was the biggest purchase in the company's 29-year history. And it was a savvy move.

"Strategically, it allows the company to benefit from smartphone growth in two different ways," Michael says. "It now sells the chipsets that go into the Wi-Fi gear and it sells the chips that go into the smartphones that connect to the Wi-Fi networks."

And the company is targeting other growth areas beyond mobile, including wearable tech, the connected car, and the Internet of Everything (IoE).

A Forecast For Profits

The numbers continue to look really good.

Over the past four fiscal years, Qualcomm has grown revenue at a 35% compound annual rate. At that rate, sales will double in less than two years.

During the same period, the company grew its pretax earnings at a rate of 27% a year, meaning that in 2.5 years they could roughly double.

Qualcomm has 29% operating margins and a return on stockholders' equity (ROE) of 17%.

Another thing we really like: The company has about $16 billion in net cash on hand. That works out to about $9.85 a share – a hefty 12% of its share price. That gives the management team some very nice maneuvering room, and also will act as a bit of a cushion in case of a temporary downturn in tech-stock prices.

Wall Street has a target price of $85 on the stock – an increase of only 8% in a year.

But Michael sees an even-bigger upside.

"You know, Bill, I've studied this firm's finances in detail – as I know you did two years ago – and I, too, like what I see … a lot," Michael said. "According to my projections, earnings per share (EPS) could grow by as much as 15% a year over the next five years. Now if we use what I call my 'doubling calculator' – mathematicians call it the Rule of 72 – and divide that number by the 15% projected growth rate – we see that it should take about 4.8 years for profits to double. With a little bit of multiple expansion, which you'll often see with a more-predictable stock, Qualcomm's share price could double a bit more quickly than that."

And that's what we like to hear.

Have a great week.

[Editor's Note: Unless otherwise directed, we recommend investors employ a 25% "trailing stop" on all holdings.]

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