Stock Spotlight

Qualcomm still at top of its game

 

In Qualcomm ($162; QCOM) we see two stories:

1) The semiconductor maker has fallen 24% from its June 18 closing high of $227. In contrast, the S&P 500 Technology Sector Index has dipped 4%. Profit-taking and concerns about weakness in demand for smartphones contributed to sharp sell-offs of many stocks in that industry, including Qualcomm.

2) Over longer periods, Qualcomm has delivered returns impressive enough to trounce the sector index. The stock has returned 54% over the last 12 months, outperforming the index by nearly 11%. Naturally, we appreciate the second story more than the first. Despite Qualcomm’s strong share-price gains, the shares still trade at 18 times trailing earnings, 44% below the industry median and 17% below their own five-year norm of 21.7.

Qualcomm, which seems poised to deliver double-digit profit growth in each of the next two years, earns a Focus List Buy rating.

Growth story continues

We expect Qualcomm’s shrewd market positioning to continue supporting superior profit increases, which in turn should drive superior returns. Qualcomm’s Snapdragon platform is gaining share in the on device artificial-intelligence market, setting the company up for years of growth. The company also believes it can leverage its position in personal computer processors into a key role once AI PCs go into development — a long-cycle story, but one well worth the read.

Qualcomm also holds large and growing positions in the markets for chips for consumer devices (internet of things, or IoT) and automobiles. Auto revenue jumped 87% in the June quarter, and the industry should remain one of Qualcomm’s top growth drivers.

The lure of AI and automotive growth should not drive us to forget the old-fashioned business of providing microchips that run Android smartphones. Weakness in handset sales weighed on results in recent quarters, but that market is recovering, helped by a surge in China, where revenue from smartphones rose 50% in the June quarter.

Unlike most other chipmakers, Qualcomm relies heavily on technology licensing (15% of revenue, 32% of operating profit in the nine months ended June). Its vast library of patents for 3G, 4G, and 5G wireless communications has provided a recession-resistant base of revenue.

In addition, the company hasn’t slacked up on research and development (roughly 25% of revenue), and many analysts expect Qualcomm to maintain its technology leadership in the 6G era.

Qualcomm Inc., 5775 Morehouse Drive, San Diego, CA 92121, (858) 5871121, www.qualcomm.com.

 

 

 

 

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