I can’t remember the last time I wrote about Qualcomm (NASDAQ:QCOM) or QCOM stock. However, when I saw InvestorPlace colleague Josh Enomoto had written a piece about the San Diego semiconductor giant, I just had to write something about the company, because Josh knows a thing or two about tech stocks.
In his March 12 article, he talked a lot about the ongoing legal battle between Qualcomm and Apple (NASDAQ:AAPL), a dispute over Apple’s alleged intellectual property infringement.
As Jack Nicholson said in the 1983 film Terms of Endearment, I’d rather stick needles in my eyes than discuss intellectual property infringement.
Nonetheless, my colleague did suggest Qualcomm is a good stock for both speculators and dividend-income investors, so it makes sense to at least consider which is the better stock.
My bet’s on Apple, but to be fair to Qualcomm, let’s at least compare the two from a couple of relevant perspectives.
Free Cash Flow and QCOM Stock
While most new investors tend to focus on earnings per share, it’s free cash flow that separates the great companies from the merely good or mediocre ones. The UK financial site Shares does a good job explaining its importance.
“Free cash flow is the money left over after a company has met its operating and capital expenditure requirement. …” Shares’ August 2018 article stated. “One of the best characteristics of free cash flow is that it is difficult to fudge using creative accounting. This cannot be said for other important metrics such as earnings per share which can be manipulated.”
I’ll often consider a company’s free cash flow yield (free cash flow divided by market cap) to get an idea of how cheap a stock is. Value investors, for instance, tend to like to see a minimum FCF yield of 8% before getting interested in a company.
A quick look at Morningstar shows that Qualcomm’s free cash flow in its most recent fiscal year was $3.1 billion, giving it an FCF yield of 4.6%. In Apple’s most recent fiscal year it had free cash flow of $64.1 billion for an FCF yield of 7.5%, 290 basis points clear of Qualcomm.
By a fundamental valuation metric, Apple is much cheaper than QCOM stock.
Net Debt and QCOM Stock
Any company that has significant free cash flow is unlikely to have unusually high net debt which is defined as cash, cash equivalents, and marketable securities less long-term and short-term debt.
In recent years, Apple’s increased the amount of debt on its balance sheet, so why don’t we start with Tim Apple’s (oops, I mean Cook’s) business. In the company’s most recent fiscal year it had $237.1 billion in cash, cash equivalents, and marketable securities. On the liability side of the balance sheet, it had $102.5 billion in short-term and long-term debt leaving it with net cash (more cash than debt) of $134.6 billion.
Over at Qualcomm, it had $12.1 billion in cash, cash equivalents, and marketable securities as of the end of September, its fiscal year-end and short-term and long-term debt of $16.4 billion, leaving it with $4.3 billion in net debt.
Which would you rather have if you were a CEO? $134 billion in net cash or $4.3 billion in net debt?
I think it’s fair to say that Apple has a better balance sheet.
QCOM Stock Is Not the Better Buy
I can hear the Qualcomm shareholders screaming.
“It’s not a fair comparison. It doesn’t take into account the ongoing legal battle or what that means to each companies’ balance sheets. Nor does it consider the fact that Qualcomm is a semiconductor company while Apple is a consumer brand much like Nike (NYSE:NKE) or Lululemon (NASDAQ:LULU).”
Fair enough.
But as Warren Buffett would say, if you only had 20 opportunities to buy stocks in your lifetime, would you pick Qualcomm over Apple?
I don’t think so.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
