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Qualcomm's Still the Best Way to Play Chips

NEW YORK ( TheStreet) -- A big deal was made when, in the April quarter, Qualcomm (QCOM - Get Report) management issued guidance that was below Street expectations. Investors immediately began to panic, suggesting Qualcomm's reign over the chip industry was coming to an abrupt end. There were also rumblings about threats to Qualcomm's chipset margins, which had come under pressure.

It was clear that the average selling price (ASP) of mobile devices were not as stout as they once were. After two years of strong growth, prices were beginning to come down, spurring more investor anxiety about high-end device saturation. This had a direct impact to not only Qualcomm, but also rivals including Broadcom (BRCM). But even though shares of Qualcomm had fallen almost 10% since reaching a high of $67.65 in April, I never believed that it was time to worry.

What I have always known is that, despite how weak the numbers look, Qualcomm's results were always better than the closest rival. With each passing quarter, there were no debate that Qualcomm is still winning the device battles by a greater margin. This means that as long as the mobile devices race continues between Apple (AAPL) and Samsung, Qualcomm wins either way. And this recent quarter, during which Qualcomm posted 35% year-over-year revenue growth, was a perfect example.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12010429/1/are-preferred-stocks-worth-the-risks.html"><em>Are Preferred Stocks Worth the Risks?</em></a>]

By contrast, Broadcom, which I've always considered the second best within the sector, posted growth of only 6%, which missed estimates. Qualcomm, meanwhile, was able to beat estimates by 3%, helped by a strong showing in its chip business, which surged almost 50% year over year. The company benefited from a slight recovery in ASP's and strong unit shipments. I referenced this earlier: It's no coincidence that Apple also surprised the Street with higher-than-expected iPhone sales.

Here, too, Qualcomm is outperforming Texas Instruments (TXN), which posted nearly a 9% decline in revenue, making this now the seventh consecutive quarter of year-over-year declines. But despite the stark contrast in operational performance, Texas Instruments still enjoys a P/E that is four points higher than Qualcomm, which suggests that investors are still expecting more from Texas Instruments.
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