JHVEPhoto
Article Thesis
QUALCOMM Included (NASDAQ:QCOM) (“Qualcomm”) is a semiconductor participant with interesting development and AI tailwinds that trades at a valuation that’s removed from excessive. Whereas shares have moved up properly this yr, Qualcomm stays a sexy long-term funding at present costs.
Previous Protection
I’ve coated Qualcomm Included previously right here on Searching for Alpha, most just lately in early Might, the place I took a take a look at the corporate’s most up-to-date quarterly earnings outcomes. I gave QCOM a “Purchase” ranking again then, which has labored out nicely thus far, as shares are up 14% since then. With Qualcomm receiving consideration as a consequence of a few information gadgets and with its subsequent earnings outcomes developing this month (post-market July thirty first), it’s time to take one other take a look at the semiconductor firm.
Qualcomm: Latest Information
Over the past couple of days, Qualcomm was within the information a few occasions:
The primary information merchandise is expounded to sanctions in opposition to Chinese language tech participant Huawei. A number of provider or export licenses had been revoked by the U.S. authorities, which had allowed corporations reminiscent of Qualcomm to export their chips to Huawei, so the Chinese language tech large might use them to fabricate smartphones, notebooks, and so forth. Among the many affected corporations with revoked licenses are Qualcomm and Intel Company (INTC).
Whereas Huawei’s flagship telephones use chips made by Semiconductor Manufacturing Worldwide Company (OTCQX:SIUIF), such because the Kirin 9000 collection, Western semiconductor corporations have nonetheless been supplying chips and expertise to Huawei. The truth that a few export licenses have now been revoked is a destructive, however removed from a catastrophe for each QCOM and INTC. In any case, Huawei is only one producer of smartphones, notebooks, and so forth amongst many others, and each corporations have probably recognized for years that the revenues that might be generated through gross sales to Huawei had been removed from set in stone. In any case, many export licenses had not been greenlighted previously, both, and Western chip corporations had greater than sufficient time to regulate to this reality and to give attention to Western (or Western-aligned) clients reminiscent of Apple Inc. (AAPL) or Samsung Electronics Co., Ltd. (OTCPK:SSNLF). I thus don’t consider that current adjustments in export licensing change the bullish thesis for Qualcomm.
One other information merchandise we just lately received is {that a} newly launched Samsung laptop computer, the Galaxy Guide 4 Edge, was fighting some software program from Adobe Inc. (ADBE) and a few widespread video games reminiscent of Fortnite. Since Qualcomm is the provider of the CPUs used within the Galaxy Guide 4 Edge, this information was tied to QCOM, and shares pulled again. However whereas it is a matter that Samsung’s new pocket book, branded as an AI pocket book, is having hassle operating some widespread software program, I consider that it’s extremely probably that this is not Qualcomm’s fault. In any case, issues with a few particular applications appear extra like a compatibility downside stemming from the working system, lacking or incompatible drivers, and so forth.
Furthermore, the Galaxy Guide 4 Edge is not a gaming gadget anyway, so potential clients will, I assume, not thoughts points with a few particular video games an excessive amount of. For these occupied with gaming, devoted gaming gadgets are higher suited than a power-efficient and slim pocket book anyway. Whereas Qualcomm received some destructive information right here, I consider that this is not a long-term downside for the corporate. Its Snapdragon chips aren’t actually made for gaming (and are not branded as gaming chips), and it appears more likely to me that QCOM’s chips aren’t the problem with regards to the pocket book’s issues in operating some particular applications.
The third information merchandise associated to Qualcomm is a report by Financial institution of America Company (BAC) about energetic managers rising their publicity to the corporate, though energetic managers decreased their publicity to the general semiconductor business. In different phrases, energetic managers have elevated their publicity to QCOM relative to different chip corporations — which might be a constructive indicator for Qualcomm, as these energetic managers would not enhance their publicity in the event that they thought that Qualcomm was a nasty choose. These energetic managers appear to consider that QCOM is extra promising in comparison with the common chip firm, which is a constructive signal — though these cash allocators could be improper, and thus outperformance is not assured, after all.
Qualcomm: Earnings Outlook
Later this month, Qualcomm will report its fiscal third-quarter earnings outcomes. Thus far, the outlook is sort of constructive: Wall Avenue analysts are forecasting a rise of 9% with regards to the corporate’s revenues, with the top-line being anticipated at $9.2 billion. Over the past couple of months, we’ve got seen many upward revisions, which implies that analysts might enhance their estimates additional till the corporate’s earnings outcomes are introduced.
Over the past three years or twelve quarters, Qualcomm has overwhelmed the consensus income estimate ten occasions. The corporate thus has a observe report of outperforming expectations. Thus, I would not be very stunned if QCOM managed to beat the consensus estimate as soon as extra with its upcoming report. A income enhance of 10%+ thus appears doable for positive, though it’s not set in stone. Income development will probably be pushed by contributing components reminiscent of larger licensing income and development within the automotive enterprise — the automotive enterprise confirmed a income development price of 35% throughout the latest quarter.
With regards to income, Qualcomm is forecasted to see a steep 20% enhance on a per-share foundation. This development will probably be pushed by the anticipated income enhance, working leverage (working prices are distributed over a bigger income and gross revenue base), and share repurchases, which give a pleasant little further enhance to QCOM’s earnings per share quantity due to a declining share rely quantity.
With regards to its previous earnings per share efficiency, relative to expectations, Qualcomm once more has a powerful observe report. It has overwhelmed the analyst consensus in 10 out of the final 12 quarters, thus one other earnings beat would not be a lot of a shock. However even when QCOM would not beat estimates this time, the anticipated 20% earnings per share enhance can be a reasonably sturdy end result.
QCOM: Vital Lengthy-Time period Potential
With regards to a inventory’s whole return potential over the long term, a number of components are essential. Valuation performs a task, after all, as a consequence of potential whole return tailwinds from a number of growth and potential whole return headwinds from a number of compression. Underlying earnings per share development performs a task as nicely, and eventually, dividends can have a serious influence on the returns an investor sees over time.
Whereas Qualcomm will not be a discount at 20x ahead internet income, it’s removed from costly. Many different chip corporations, together with ones with weaker development reminiscent of Intel, are buying and selling at larger valuations. Different AI-exposed chip gamers reminiscent of Superior Micro Gadgets, Inc. (AMD) or Broadcom Inc. (AVGO) commerce at a lot larger valuations in comparison with QCOM — AMD is valued at 47x this yr’s earnings, whereas Broadcom trades at 35x this yr’s earnings. On a relative foundation, QCOM thus might have some upside potential.
The earnings development outlook is constructive as nicely, due to underlying market development in areas reminiscent of handsets and the rising automotive enterprise. Add margin tailwinds from working leverage and buybacks, and QCOM might develop its earnings per share at a pleasant tempo over the approaching years. Analysts are forecasting earnings per share development of 18%, 14%, and 10% for the present yr, subsequent yr, and the one after that.
If these estimates are hit, QCOM will earn $12.50 in fiscal 2026 — put a 22x earnings a number of on that, and QUALCOMM would commerce at $275 a bit of greater than two years from now, which might make for a pleasant share value return of 35% in comparison with the present share value of $204. After we embrace the dividend, the entire return can be even higher, at near 40% over the subsequent two years — even when QCOM doesn’t outperform earnings per share estimates going ahead, whereas it has executed so previously.
Even when Qualcomm had been to commerce at simply 18x internet earnings two years from now, traders would see their shares rise to $225, which might make for a return of 14% together with dividends over the subsequent two years — not particularly nice, however nonetheless removed from dangerous. QCOM might thus generate cheap whole returns even when its valuation had been to say no by 10%, which implies that we don’t want bullish assumptions for QCOM to be a strong funding.
Takeaway
The response to the current Samsung pocket book information appears overblown to me, and since Qualcomm has an interesting development outlook, a compelling shareholder return program, and an undemanding valuation, I stay bullish on this chip participant. I’m very proud of my place thus far.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.
