Qualcomm Inc. (NASDAQ:QCOM) recently announced robust results for its fiscal Q1 ended December 31, showcasing strong free cash flow (FCF) and FCF margins. This performance has led to suggestions that QCOM stock could be undervalued by up to 18%, presenting an attractive short-term income opportunity.

In its fiscal Q1, the wireless telecom technology company reported a 5% year-over-year increase in revenue to $9.9 billion, with diluted earnings up by 24%. Notably, its FCF stood strong at $2.735 billion, calculated as $2.95 billion in operating cash flow minus $214 million in capex spend.

As a result, QCOM stock has surged by 14.8% from $148.51 to $170.47 as of morning trading on March 11. However, considering the company’s robust free cash flow, there’s a possibility that QCOM stock remains undervalued.

FCF and FCF Margins

Qualcomm’s FCF of $2.735 billion accounted for 27.5% of its $9.935 billion revenue for the quarter, a figure consistent with its last 12 months (LTM) FCF margin of 27.2%. This stable FCF margin can be utilized to forecast future FCF. Analysts estimate revenue of $9.7 billion for the year ending September 2024 and $10.75 billion for the following year, indicating a next 12 months (NTM) run rate of $10.3 billion.

Applying a 27.5% FCF margin results in an FCF forecast of $2.83 billion. Furthermore, with a slight improvement in margins to 28%, FCF could rise to $2.884 billion.

Target Price

Utilizing this forecast, a price target for QCOM stock can be established. Assuming the company pays out 100% of its FCF as dividends (presently at 35.6% of LTM dividends to LTM FCF), a potential improvement in dividend yield is anticipated.

For instance, using a 1.25% FCF yield, the stock’s market capitalization could rise to $230.7 billion. This suggests a potential gain of 21% over the existing market cap of $190.27 billion, translating to a target price of $206.27 per share.

Shorting OTM Puts in QCOM Stock

Given the high premiums on Qualcomm’s put options, shorting out-of-the-money (OTM) strike prices in nearby expiry periods appears attractive. For instance, the $160.00 strike price for the March 28 expiration period, which is over 6% below the current price, offers a premium of $1.21, yielding a return of 0.756%.

Repeating this trade for the same yield over the next 90 days could result in an expected return of over 3%, significantly higher than the annual dividend yield of QCOM stock.

Investors in QCOM stock can thus capitalize on this potential undervaluation while generating additional income by selling to open OTM put options. Even if the stock falls below $160, investors can benefit from a lower breakeven and downside protection.

In conclusion, investors in QCOM stock can profit from its potential price appreciation while earning extra income by shorting OTM put options in nearby expiry periods.

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