Qualcomm (NASDAQ:QCOM)
Qualcomm (NASDAQ:QCOM) is a top semiconductor pick. It’s a leader in 5G technology, and we love its prosperous licensing business. Qualcomm provides investors dividend growth and capital appreciation upside potential, helped by its excellent cash flow generation and long-term solid growth forecast. Qualcomm’s shares yield 2.3% as of this writing, and our enterprise cash flow analysis fair value estimate is $177 per share. Shares last traded at $127.
Key Qualcomm Investment Considerations
Qualcomm is transforming the telecom, mobile phone, and vehicle sectors. The corporation invests extensively in R&D and licenses or sells breakthrough technologies like semiconductor components and software. Qualcomm is based in San Diego, California.
We view Qualcomm (NASDAQ:QCOM) long-term growth outlook favorably because the company is well-positioned to capitalize on secular tailwinds such as the Internet of Things (IoT) trend, the proliferation of 5G-capable smartphones, the rollout of 5G networks, and the rise of autonomous and semi-autonomous vehicles.
Qualcomm (NASDAQ:QCOM) outlook improved after dropping all lawsuits with Apple Inc (AAPL) and signing a multiyear license and chipset supply arrangement in April 2019. Qualcomm’s dominance in 5G positions it well for expansion and undoubtedly influenced the settlement. In July 2020, Qualcomm settled a lucrative patent fight with Huawei, but Western sanctions remain. These transactions helped Qualcomm’s stock price and long-term prospects, which we applaud.
Auto ambitions
In April 2022, SSW Partners and Qualcomm (NASDAQ:QCOM) bought Veoneer. Here’s why Qualcomm’s agreement is significant and how it went down.
First, SSW Partners bought Veoneer via an all-cash agreement with a $4.6 billion equity valuation. Total cash considerations amounted to $4.7 billion after including Magna International Inc.’s $0.1 billion termination fee (MGA). After that, SSW Partners sold Veoneer’s Arriver business segment to Qualcomm, which focused on advanced driver assistance systems and autonomous driving solutions. Duo outbid Magna International for Veoneer.
Until the Tier-1 supplier company is sold, SSW Partners runs Veoneer. The comment is that Qualcomm is still tracking the financial success of these non-Arriver activities under the variable interest model. Here’s an important note from Qualcomm’s recent 10-Q SEC filing on the issue:
We’ve promised to offer $300 million in capital to Non-Arriver firms while SSW Partners finds a buyer. As of June 26, 2022, $150 million remained available. Such funds, combined with cash maintained in the Non-Arriver company, are projected to finance operating and other near-term capital requirements and some acquisition expenditures.
We don’t own or control the Non-Arriver companies [particularly the Tier 1 supplier company], yet we are the principal beneficiary of these firms under the variable interest model, per FASB consolidation guidelines [ASC 810].
By bringing in SSW Partners to manage the Tier-1 supplier business, Qualcomm can concentrate on integrating Veoneer’s automotive technology without operating a company outside of Qualcomm’s strategic focus. Qualcomm’s automotive business is a primary focus because of the increasing computational power required by modern cars and attractive potential in self-driving and assisted driving technologies.
This transaction for Veoneer’s Arriver business is part of a much more comprehensive plan. In January 2020, Qualcomm revealed its Snapdragon Ride automotive platform, which allows self-driving and improved safety. By 2023, Snapdragon Ride-equipped cars will be available.
Qualcomm introduced Snapdragon Ride Vision System two years later, in January 2022, to improve semi-autonomous and fully-autonomous driving camera deployment. 2024 is when Snapdragon Ride Vision vehicles will be ready. We warn that supply chain concerns, geopolitical conflicts, and other factors may affect development timelines.
Profit Report
Qualcomm (NASDAQ:QCOM) released fiscal 2022 third-quarter profits on July 27 that topped top and bottom-line forecasts. The corporation is on fire. Qualcomm’s recent earnings statement called for the company’s strong growth momentum to continue in the fourth quarter, but its short-term estimates were softer than Wall Street hoped.
Before discussing Qualcomm’s short-term outlook, let’s examine its good financial condition. Qualcomm’s GAAP sales climbed 36% year-over-year to $10.9 billion. Its revenue growth was led by Qualcomm CDMA Technologies (‘QCT’), which produces and provides semiconductor components and software. Handset, radio front-end, vehicle, and Internet of Things sales grew nicely.
QTL, which licenses Qualcomm’s technology, achieved a 2% year-over-year revenue increase last quarter. The firm’s QCT business earns the most revenue, but its QTL section is very profitable, with segment-level operating margins of 71.1% last fiscal quarter. In the first three quarters of fiscal 2022, Qualcomm spent 18% of sales on R&D, underscoring management’s dedication to innovation.
Due to growth throughout its business, Qualcomm’s GAAP operating income quadrupled year-over-year to $4.5 billion last fiscal quarter. (Not all of Qualcomm’s revenue and costs are ascribed to its QCT and QTL divisions.) GAAP diluted EPS climbed 86% year-over-year to $3.29, while non-GAAP diluted EPS rose 54% to $2.96 in the third quarter.
In the first three quarters of fiscal 2022, Qualcomm earned $6.0 billion in free cash flow (defined as net operating cash flow fewer capital expenditures). During this time, the company spent $2.4 billion on dividends and $2.6 billion buying back shares. We love Qualcomm’s cash flow. Qualcomm ended its third quarter with $8.7 billion in net debt (including current marketable securities and short-term debt). Qualcomm’s $6.8 billion cash-like assets offer enough liquidity for near-term financing after the quarter.
Qualcomm (NASDAQ:QCOM) forecasts $11.0-$11.8 billion in sales (midpoint 22% increase) in the upcoming fiscal quarter. Near-term revenue growth is projected to be led by QCT, while QTL is expected to remain highly profitable. Qualcomm predicts non-GAAP diluted EPS of $3.00-$3.30 (up 24%) and GAAP diluted EPS of $2.53-$2.83 (up 9%) in the fourth quarter. As Qualcomm’s near-term outlook calls for double-digit sales and profitability growth, we consider market anxieties about its growth trajectory as overstated.
The Qualcomm Profit Analysis
The most excellent way to gauge a company’s capacity to build shareholder value is to compare its ROIC to its WACC. ROIC minus WACC is a firm’s economic profit spread. Qualcomm’s 3-year return on invested capital (without goodwill) is 74.6%, above its 9.4% cost of capital.
The graphic below shows ROIC’s likely direction in the following years based on the volatility of significant factors. The solid gray line shows our fair value assessment and the most probable outcome. Qualcomm has consistently generated shareholder value, and we anticipate it will continue in the following years.
Cash-flow valuation of Qualcomm
Our discounted cash flow approach evaluates each corporation’s present value of all future free cash flows, net of its balance sheet. We estimate Qualcomm is worth $177 per share, or $142-$212. Near-term revenue and profit expectations utilized in our enterprise cash flow models are similar to consensus estimates and management guidance.
Our model predicts a CAGR of 9.5% over the next five years, which is lower than the company’s 3-year CAGR of 13.9%. Our model predicts a 5-year operating margin of 35.4%, above Qualcomm’s trailing 3-year average. Beyond Year 5, we project free cash flow will rise 3.4% annually for 15 years and 3% in perpetuity. We discount Qualcomm’s free cash flows using a 9.4% weighted average cost of capital.
The margin of Safety Analysis by Qualcomm
We estimate Qualcomm’s fair value at $177 per share, but any firm has a range of possible fair values due to important valuation variables (like future revenue or earnings, for example). If the future were guaranteed, markets wouldn’t be volatile since equities would trade at their fair valuations.
In the above graph, we demonstrate Qualcomm’s fair value range. Below $142 per share (the green line), we believe the stock is attractive, but beyond $212 per share, it’s costly (the red line). Prices along the yellow line, which includes our fair value assessment, suggest a realistic valuation, in our view. As of this writing, QCOM shares are trading below our fair value estimate range, suggesting they are undervalued or “cheap.”
Profit analysis
The graphic above illustrates the Dividend Cushion ratio’s numerator and denominator. The better a company’s financial sheet and future free cash flow creation compared to its cash dividend commitments, the more durable its dividend. Qualcomm’s numerator is more significant than its denominator, indicating solid dividend coverage in the future.
The Dividend Cushion Ratio Deconstruction picture compares sources of free cash with predicted dividend payments over the next 5 years. As the Dividend Cushion ratio and many of its components are forward-looking, our dividend evaluation may change as future forecasts are updated.
Risks
There are hazards to our Qualcomm (NASDAQ:QCOM) premises. A rival surpassing Qualcomm’s 5G capability would hurt its licensing revenue and negotiation powers. Qualcomm secured hefty agreements with Apple and Huawei because the businesses had no alternative if they wanted 5G handsets. Qualcomm must be a leader in 6G technology, or significant parts of its business could become obsolete.
Qualcomm’s downside risk is US-China trade tensions. Qualcomm’s China market share has fallen owing to Western restrictions on Chinese IT firms. Qualcomm must comply with Western restrictions and seek expansion elsewhere. Qualcomm has also faced supply chain challenges during COVID-19. The company’s management team has done a great job managing these challenges while maintaining its development runway by establishing arrangements with different suppliers for the same items. We like Qualcomm’s growth prospects but warn that the company faces several difficulties.
Thoughts
Qualcomm (NASDAQ:QCOM) seeks to tackle the challenges it creates as technology becomes more complicated. Providing advanced technology at scale is one of the firm’s mantras for transforming its company and the world. The business aims to deliver semiconductor components to support IoT, allow 5G phones and equipment, and meet the expanding computing demands of the automobile sector.
Qualcomm (NASDAQ:QCOM) has returned tens of billions to stockholders since 2003 through share repurchases and dividends. The corporation generates a lot of free cash flow while having a significant net debt burden due to recent share repurchases. Share buybacks and possible M&A activities must be watched. Qualcomm’s licensing approach is unchanged following Apple and Huawei deals.
Qualcomm (NASDAQ:QCOM) 5G strength positions it was favorably going ahead. We like Qualcomm’s dividend growth and capital gain prospects.
Featured Image – Megapixl © Michaelvi
Author Shariq Khan 