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This Chipmaker is the Baddest Dude on the Block

The bullish views on the semiconductor sector just keep coming.

A day or two after we told you about our upbeat outlook for chip stocks, the Semiconductor Industry Association (SIA) announced that November was the best month of 2012 for global microchip sales.

In other words, chip sales are continuing to accelerate, and the sector enters the New Year on quite a hot streak – just as we told you it would.

According to the SIA report, the "Americas" regions really paced the gains, rising a hefty 9.7% from November 2011 – the biggest year-over-year increase since April 2011. Sales in the Americas (North, South and Central America combined) were up 5.1% on a "sequential" basis, meaning from the month before.

"The global semiconductor industry navigated difficult macroeconomic conditions in 2012, but encouraging growth led by the Americas in recent months has the industry pointed in the right direction heading into 2013," SIA President and CEO Brian Toohey said of the statistics.

On Jan. 7, we followed up on our forecast by detailing two recommendations from resident high-tech guru Michael A. Robinson, editor of our Radical Technology Profits advisory service. One of those recommendations – ARM Holdings PLC (NYSE ADR: ARMH) – has already surged nearly 10%.

I promised we'd return with at least one more chip-stock idea for you.

And you're going to like what we found.

You see, this semiconductor player has added some major muscle in the last few years.

It used to able to kick some sand on its rivals now and then. But now this company's technology is so strong, its market share so hefty and its lead on its rivals so large that it no longer has to rely on such hit-and-run tactics with those other companies.

It's now one of the baddest boys on the block. Now it can punch them right in the nose.

I'm talking about Qualcomm Inc. (Nasdaq: QCOM), the world's largest maker of chips for mobile phones.

At my request, Chief Investment Strategist Keith Fitz-Gerald and Director of Performance Analytics Sid Riggs looked for profit opportunities in the semiconductor sector.

Keith and Sid focused on the segments (such as tablets, smartphones and wireless) and the geographic markets (such as the United States and China) with the biggest growth potential, and came up with a short list of the major potential beneficiaries.

Though I didn't get into the details due to some tight deadlines, I know those two gents typically take a list of investment candidates like that, and apply the usual technical- and fundamental-analysis screens to help cut the list down. Keith usually also employs some of his proprietary analytics – including some of the same ones he employs with his Geiger Index … the trading service that has a success rate of better than 90% in its four-year existence.

The bottom line: When they got back to me late last week, they had culled the list to one name – Qualcomm.

We actually had a bit of a laugh about this.

You see, Qualcomm was the featured stock in our April 2012 Private Briefing special report: "How to Profit From the Biggest Wireless Spending Boom Since the Invention of the Cellphone." In that report, we explained how the consumer stampede to smartphones and the massive spending boom on 4G LTE technology (known as "4G Lite" in telecom circles)
was going to ignite the afterburners on the shares of the San Diego-based leader in wireless chip design.

In essence, Keith and Sid's rigorous analysis validated the research we gave you last year.

"Although it's not one of our usual "off-the-radar' picks, this is a stock you really have to like the looks of," Keith told me last week. "4G LTE-enabled devices are the wave of the future as customers increasingly shift their computing needs from laptop and desktop computers to mobile devices such as smartphones and tablets. And to  allow these faster devices to work like they're designed to, the industry will have to move away from the slower 2G and 3G networks and embrace the new gold standard of wireless technology – 4G LTE. And Qualcomm should be a prime beneficiary – just as you said before, BP."

Qualcomm has become a heavyweight contender among chipmakers in general. In 2012, the company jumped three spots in the IHS iSuppli ranking of the world's biggest makers of semiconductors for 2012. As measured by revenue, Qualcomm now trails only Intel Corp. (Nasdaq: INTC) and Samsung Electronics Co.

And thanks to the surge in demand for mobile phones – and particularly smartphones – Qualcomm now has a 42% share of the mobile-application processor market, according to market researcher Strategy Analytics.

Not surprisingly, Qualcomm is a leading supplier of 4G Lite chipsets for mobile devices. It provides the processing power for the Apple Inc. (Nasdaq: AAPL) iPhone 5, the Samsung Galaxy S III (in the U.S. market), the HTC One X and the Motorola Razr Maxx.

Initially, 4G LTE networks will be confined chiefly to developed networks like the United States. But that will change as developing countries such as China and India implement the technology – which they are already beginning to do. Eventually, consumers in emerging markets – even beyond the leading-edge emergent "BRIC" economies of Brazil, Russia, India and China – will demand the products and services that are in use in the West.

"When that happens, BP – and it will – it will ignite a growth wave that outstrips any current forecast for 4G LTE," Keith explained.

Sid bolstered Keith's analysis with six factoids – which viewed together paint quite a portrait of Qualcomm's business opportunities. This is a company that will have great growth (and profit) potential for years to come. Consider that:

  • The 4G chipset market will grow at a compound annual growth rate (CAGR) of roughly 100% from 2012 to 2016, says 4G chipmaker Sequans Communications SA (NYSE ADR: SQNS). That's spectacular growth.
  • LTE device shipments are expected to reach approximately 535 million by 2016 -up from less than 100 million last year, according to an ABI Research report released in September.
  • Aggregate LTE device shipments from 2012 to 2016 will exceed 1.6 billion – a staggering total, according to industry research.
  • By 2017, 85% of the world's population will be served by high-speed mobile networks, says a 2012 forecast by Swedish telecom company Ericsson (Nasdaq ADR: ERIC). These networks will mostly be based on WCDMA/HSPA. But LTE will be available at the high-end – led by deployments in the United States, Korea, Japan and Western Europe).
  • Almost 60% of operators plan to launch LTE-based services in 2012 (33.7%) or 2013 (24.9%), according to a May 2012 survey of mobile operators by Informa.
  • LTE will account for 90 million mobile connections in 2012, led by the United States, South Korea and Japan, Strategy Analytics said in a survey released the same month as the Informa study. Strategy Analytics predicts that LTE will soar to reach 1 billion connections by 2017 – when it will comprise 15% of all mobile connections.

The bottom line here: There's going to be one heck of a lot of demand for high-end, high-performance chips between now and the end of this decade.

A year ago last week, Qualcomm unveiled its new Snapdragon 800 and Snapdragon 600 processors, each designed for high-end mobile devices.

The Snapdragon 800, which supports the 4G LTE standard, was designed for the premium smartphone category. It boasts a racy 2.3 gigahertz clock speed and an improved battery backup. (If you read our report, you'll see that the big battery drain that's a hallmark of 4G networks has been a real downer for consumers. Qualcomm's attention on this issue a full year ago underscores the company's position as an innovator, and its customer focus.)

Both of these processors were distributed as samples back then, but were expected to be commercially available in the second half of this year – which should punch up the company's top-line growth rate. The chips are a whippet-like 75% faster than their predecessors, according to Qualcomm.

Despite all these great prospects, however, the stock remains cheap. Its Price/Earnings (P/E) ratio is 18.37 – very low for a company with Qualcomm's strong growth profile.
Back on Nov. 7, Qualcomm reported fiscal 2012 earnings of $3.51 per share, a 39% increase from the year before. The company's revenue of $19.12 billion represented an increase of 28% from fiscal 2011. Qualcomm's fiscal year ended Sept. 30.

Chief Executive Paul Jacobs said he expects his company to deliver a compound annual growth rate of at least 10% for revenue and earnings per share (EPS) over the next five years.

Qualcomm intends to pull this off by innovation and accelerated product introductions – and by turning up the heat such rivals as Intel and NVidia Corp. (Nasdaq: NVDA), each of which are now targeting the wireless market.

"The pace of mobile is really accelerating and we think we're driving it," Qualcomm Chief Operating Officer Steve Mollenkopf told journalists at the International Consumer Electronics Show in Las Vegas last week. "The game is getting more challenging, and the benefit to the consumer is that you're going to see much more exciting devices in the market."

Intel is the No. 1 maker of processors for computers, but has struggled in its efforts to penetrate the handset/mobile device market. It finally got a start in phone processors last year, and is now featured in smartphones made by Google Inc.'s (Nasdaq: GOOG) Motorola Mobility unit, among others.

Even so, Intel still has less than a 1% share of the mobile-chip market, Bloomberg News reports. Intel also plans to offer a quad-core version of its tablet chip, code-named "Bay Trail."

But published reports state that these chips won't be available until the 2013 holiday shopping season, meaning Qualcomm's Snapdragon offerings will have a several-month head start.

[Our New Website: As you probably noticed Friday, we've upgraded our Website. If you have any questions, or any navigation issues, please feel free to call our superb customer service team at (888) 384-8339, or (410) 226-2069. I spoke with our director of customer service on Friday and told her I was planning to post this note at the end of today's Private Briefing column. True to form, she thought it was a great idea and said her team will be happy to help with any issues you may have.]

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