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Morning Update

This morning the January NFP report was released. It showed the economy added 157,000 jobs, ticking up the unemployment rate to 7.9%. Overall the report was in line with expectations and, eased worried created by the negative GDP report on Wednesday. Private sector employment increased by 166,000, which was slightly weaker than expected but strong nonetheless. This confirms that the negative GDP report was more due to a decrease in government spending ahead of the fiscal cliff instead of negative growth in the private sector.

After the close on Wednesday Qualcomm reported better than expected 4th quarter earnings, beating on both the top and bottom lines despite weak earnings from their major customers like Apple and Nokia. The stock gapped up 6% and closed up 4% on the day. Option trading was bullish with the biggest trade of the day the purchase of 4,000 April 70 calls for $0.98 with the stock at 66.49. This trade will profit if Qualcomm is above 70.98 (6.8% higher) at April expiration.

In their earnings report Qualcomm showed that revenue increase 29% year over year and EPS came in at $1.26 versus expectations of $1.13. The strong earnings should be no surprise as Qualcomm is a dominant force in the smartphone market: they own 48% of the smartphone processor market by revenue and collect 3-5% of the sale price of every CDMA-enabled device because of their patents. But investors want growth, and Qualcomm will have to look beyond smartphones for that in the future. Their future looks to be tablet processors, where they currently have only a 4% market share.

Management is committed to growing this division of the company, and two new tablet processors are set to be released later this year. The two new processors, SnapDragon 600 and 800 will be 75% more powerful, reach speeds up to 2,3 GHz, and handle Ultra HD recording. Right now Apple and NVIDIA are the top players in the tablet processor space, but Qualcomm hopes to leverage its reputation for making the best performing smartphone processors to get their products into new tablets.

Currently Qualcomm processors power three of the iPhone’s top competitors: the HTC 8x, the Nokia Lumina, and CDMA version of the Samsung Galaxy S III. If Qualcomm’s new chip is adopted in more models, the stock could take off. The chips will be available in Q1 and Q2 this year, so investors should watch for news. This option trade is a low risk way to profit from these new chip set because it offers little downside and unlimited upside. Qualcomm has had quite a run the past few months and I would be cautious about buying the stock at these levels. But I do think it is a great play on mobile computing and would own calls to profit if it continues to take market share.


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