Qualcomm Incorporated (QCOM) focuses on advancing and commercializing foundational technologies for the wireless industry. The company is the global leader in its field. Its technologies, products, and services are employed in mobile devices and numerous wireless products, including network equipment, broadband gateway equipment, and consumer electronic devices.
Qualcomm’s inventions have contributed massively to the refinement of smartphones, connecting billions of people. Qualcomm is a central player in 3G (third-generation), 4G (fourth-generation), and 5G (fifth-generation) wireless technologies, and it should maintain its leading position going forward powered by its numerous patents and proprietary know-how.
I remain bullish on QCOM.
Robust Financials
The 5G market is still in its early stages of global adoption, as coverage has yet to reach an international scale, particularly in emerging markets. Hence, as demonstrated in the company’s latest results, demand for Qualcomm’s products and solutions continues to accelerate, driven by growth in premium Android smartphones and growth in connected, intelligent edge, through which the company is pushing digital transformation for the cloud-connected economy.
In Q1 2021, Qualcomm posted the second consecutive quarter of record revenues in its chipset business, which reached $8.8 billion. Impressively, EBT (earnings before taxes) for this segment came in at $3.1 billion, implying an EBT margin of 35%.
Not only is the company printing cash from its chipset business, but its QCT revenues surpassed those of any fabless semiconductor company, as management mentioned in the conference call. In my view, these developments greatly illustrate the continued success of Qualcomm’s growth strategy.
To dissect the subdivisions in Qualcomm’s QCT segment, the company’s handset (e.g., smartphones), RF front-end, Automotive, and IoT-related revenues, grew by 42%, 7%, 21%, and 41%, respectively, compared to the prior-year period.
Following better than expected results, management shared an optimistic outlook for Q2, forecasting revenues of $10.2 billion to $11 billion and adjusted EPS of $2.80 to $3.00. Based on Q1’s results, Q2’s guidance, and in-line estimates for the second half of the year, Qualcomm should post EPS of around $11.85. This implies year-over-year growth of 38.8% compared to last year’s results.
Capital Returns
While I appreciate Qualcomm’s future growth potential, I am particularly keen on the company’s well-established track record of capital returns. Following Qualcomm’s latest dividend hike of 4.6% almost a year ago, Qualcomm’s dividend has increased annually for 19 successive years. Hence, Qualcomm is likely on its way to attaining a Dividend Aristocrat Status.
Moreover, the company is consistently buying back stock, which additionally contributes to total shareholder returns. During its latest quarter alone, the company returned $1.2 billion to shareholders through repurchases of 8 million shares. This suggests a “buyback yield” of around 2.6% on an annualized basis at Qualcomm’s current market cap of $185 billion, on top of its 1.65% dividend yield.
Wall Street’s Take
Turning to Wall Street, Qualcomm has a Moderate Buy consensus rating, based on 14 Buys and seven Holds assigned in the past three months. At $215.40, the average Qualcomm price target implies 30.8% upside potential.
Conclusion & Valuation
Based on the Fiscal Year 2022 EPS estimate of ~$11.85, the stock’s forward P/E currently stands at around 13.8, which in my view, is a very appealing multiple considering Qualcomm’s moat, patent protection advantages, growing financials, and consistent capital returns.
On the one hand, Qualcomm’s results could swing based on the cyclicality of the underlying markets it serves (which are mostly cyclical). On the other, powered by a powerful project pipeline and 5G’s growth potential, the current valuation appears to offer an enticing opportunity for investors, in my opinion.
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