Qualcomm enjoys license to profit

Recent Price $133
Dividend $2.72
Yield 2.1%
P/E Ratio 18
Shares (millions) 1,149.8
Long-Term Debt as % of Capital 70%
52-Week Price Range $167.94 - $121.05

 

Qualcomm ($133; QCOM) differs from the traditional semiconductor maker in a highly profitable way. The company generates about 30% of its revenue from product licenses, mostly related to wireless devices.

As an early mover in wireless, Qualcomm developed much of the tech used in first- and second-generation devices, and plenty of those systems are still in use, to the point that the company continues to sign new licensing deals for 5G platforms. Not a bad profit stream if you can get it.

Of course, the equipment business also pulls its weight. In the June quarter, equipment and software revenue jumped 70%, powered by demand for radio-frequency chips and semiconductors to power the internet of things. Qualcomm, yielding 2.1%, is a Long-Term Buy.

Parsing the growth numbers

Qualcomm generated massive growth over the last 12 months, but that’s not why we recommend the stock. Instead, consider three-year annualized growth rates — 13% for sales, 29% for per-share earnings, 18% for operating cash flow, and 17% for free cash flow in a period that includes both the recession and the rebound.

Analysts expect sales to rise more than 50% and profits to nearly double in the year ending September before reverting to a solid, reasonable 10% sales growth and 12% profit growth in fiscal 2022. The 2023 targets of 3% growth for both sales and profits seem too conservative for Qualcomm, which stands to benefit more than most from the continuing 5G wireless rollout. The company gets about 50% more content in 5G phones relative to 4G.

Standard & Poor’s estimates that 225 million 5G devices shipped last year, and 500 million will ship this year — the type of growth that can support plenty of suppliers. Plus, every major handset maker licenses Qualcomm’s technology, and over the next year or two 5G investments will transition to handsets rather than primarily infrastructure. Such a shift should boost both growth and profitability for Qualcomm.

While Qualcomm is best known for its wireless products, this pony also does plenty of other tricks. In the June quarter it collected 40% of equipment revenue from end markets other than smartphone modems, the effect of years of effort to diversify its business mix.

We have another reason to expect results above analyst targets going forward. Qualcomm has exceeded consensus profit estimates in 27 consecutive quarters. Such a streak reflects both consistent operating performance and a proven ability to manage expectations.

Growth at a great price

Qualcomm trades at 18 times trailing earnings and 14 times expected 2022 earnings, both at least 30% below the industry median. Given the company’s long growth history and operational advantages, the shares likely warrant the premium valuation they have sported throughout much of the last two decades. The stock’s Quadrix® Value score of 69 is among the highest in its pricey industry.

5775 Morehouse Drive, San Diego, CA 92121, (858) 587-1121, www.qualcomm.com.

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Jun '21 $1.92 vs. $0.86 63% $145.30 - $123.68 23 - 19
Mar '21 1.90 vs. 0.88 52% 167.94 - 122.99 31 - 23
Dec '20 2.17 vs. 0.99 63% 161.07 - 114.92 39 - 27
Sep '20 1.45 vs. 0.78 35% 123.93 - 86.68 35 - 25

 

Year
(Sep.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2020 $21.7 $4.19 $2.54 $123.93 - $58.00 30 - 14
2019 19.4 3.54 2.48 90.34 - 49.10 26 - 14
2018 22.7 3.69 2.38 76.50 - 48.56 21 - 13
2017 23.2 4.28 2.20 71.62 - 48.92 17 - 11

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
90 92 69 98 79 77 10 24

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.