Qualcomm (NASDAQ:QCOM) stock is looking very cheap, considering that the deployment of 5G telecom systems throughout the world is starting to kick in. Qualcomm’s technology underpins many of those systems.
Consider, for a moment, Qualcomm’s Feb. 5 report of higher non-GAAP earnings for its fiscal Q1 earnings ending December. Revenues rose 5% year-over-year and earnings before taxes were up 28%. With that global 5G deployment, analysts are predicting that earnings will rise each dramatically each quarter for the next four quarters.
The global 5G technology market is estimated to be $5.53 billion in 2020 and reach $667.90 billion by 2026, demonstrating a CAGR of 122.3% during 2021-2026, Zacks reported last week, citing data from Allied Market Research.
Earnings per share should be up 26%-27% in the next two quarters on a year-over-year basis. In fact, fiscal Q4 ending September will likely produce 91% higher earnings. As a result, earnings for Qualcomm will be on an annual run rate of $1.36 per quarter by Q4. That means run rate EPS will be $5.44 per share within two quarters.
What does that mean? Qualcomm stock is trading at a very cheap run rate price-to-earnings ratio of 16x by September quarter-end.
Analysts Buzz is Increasing
Bloomberg published a rundown of analysts after Qualcomm reported its earnings. Raymond James, Citi, and Morgan Stanley all were positive on the stock. Most of them have set higher targets for QCOM stock.
The reason? Qualcomm is expected to be one of the largest beneficiaries of the rollout of 5G networks. However, most are talking about a gradual buildup and slow deployment of the technology. One of the reasons given is the coronavirus dampening effect on economic activity in Asia.
But these analysts have often been mistaken about Qualcomm stock. For example, earnings per share this past quarter were 14 cents higher than expected, at 99 cents, or over 16%.
Moreover, Qualcomm is projecting a wide range of 80 cents to 95 cents per share for this coming March-end quarter. So, in effect, analysts are getting a lot of help from the company.
Whatever the earnings turn out to be, one thing is for sure, Qualcomm produces a large amount of free cash flow.
Free Cash Flow is Rising Quickly At Qualcomm
Qualcomm’s free cash flow in the last 12 months (LTM) was up 294% over the same period a year ago. It generated $7.0 billion in FCF for the last 12 months ending December. The same figure a year ago was just $1.78 billion.
In fact, the LTM FCF was even up 9.7% in this past quarter on a quarter-over-quarter basis. You can see the growth in LTM FCF in the chart above — the columns in blue. It is rising each quarter.
You can also see the uses of FCF, especially buybacks (in green) which have now become lower than FCF. In the past QCOM, was buying back a lot of its stock. To fund the portion exceeding FCF sources, Qualcomm used a combination of a drawdown of its cash, asset sales and new borrowing.
In the past two quarters, it is staying within the lines, so to speak. Buybacks and dividends don’t exceed free cash flow. This will allow the company to build up its net cash reserves.
Bottom Line on Qualcomm Stock
Both management and analysts expect that the rollout of 5G networks will result in higher earnings for Qualcomm. So far, the company has surprised on the upside in this arena.
The worldwide 5G chipset market alone is valued at $1.96 billion for this year, reaching $21.87 billion by 2026, according to some projects. That’s a 44.1% CAGR.
Qualcomm stock trades for just 16x run-rate expected earnings. This is unbelievably cheap. It is a very low valuation metric given that earnings will rise significantly over the next year.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks, which includes both high dividend and buyback yields. In addition, subscribers a two-week free trial.
