We upgrade our recommendation on Qualcomm Inc. (QCOM) to Outperform. Supported by significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm reported historic high earnings in the first quarter of fiscal 2011. Net income was up 39% year over year and 35% sequentially, simply suggesting the strength of operating efficiency at this wireless technology company. The company's state-of-the-art Snapdragon platform and diversified product offerings make management more confident about fiscal 2011 as exemplified by its solid financial outlook.

Apple Inc.'s (AAPL) CDMA iPhone offers a major growth opportunity for Qualcomm. Although the company did not provide specific numbers of chipset that it will sell to Apple, it did acknowledge that CDMA iPhone is a boost for the company. Verizon Wireless (VZ) will start selling Apple iPhone 4 from February 2011. Several industry sources have also predicted that Apple may also use Qualcomm's dual-mode CDMA/WCDMA chipset for its upcoming iPhone 5. Another near-term driver is the upcoming Windows operating system developed by Microsoft Corp. (MSFT), which uses the ARM-based chipset architecture of the company.

Further, the acquisition of Atheros Communications Inc. (ATHR) will transform Qualcomm as an integrated chipset developer for the mobile computing market. Qualcomm can now act as a single window to any wireless gadget maker (mobile phone/tablets) for an integrated Snapdragon chipset platform supporting Wi-Fi. Besides mobile computing, Qualcomm can now diversify in the consumer electronics segment, particularly in the home networking market. Atheros manufactures Wi-Fi chips for televisions, video games, printers, and other home devices.

Qualcomm maintains a strong balance sheet with nearly $19.107 billion of net cash and marketable securities. The company continues to generate positive free cash on a sequential basis. We believe the company's liquid assets will further be bolstered by the sale of its FLO TV 700MHz spectrum licenses to AT&T (T) for $1.925 billion. The company also has plans in place to sell its recently awarded broadband wireless access spectrum in India for not less than $1.1 billion by mid 2011.