Whenever markets get jittery over the economy ahead, semiconductor stocks are often the first to drop sharply first. Qualcomm (NASDAQ:QCOM) is no exception to the selling pressure that chip stocks now face.
Yet for long-term investors, the drop in Qualcomm stock creates a good entry point. Not only are shares trading below 13 times forward earnings, but buy-and-hold investors will collect a dividend that yields over 3% annually.
And in February, Qualcomm announced its third-generation 5G modem RF system. The chip will position the company toward the major 5G refresh happening globally. Although the typical consumer will not notice a performance improvement with 5G service on a smartphone, the allure to upgrade is difficult to ignore.
Qualcomm’s new X60 5G is built on the world’s first 5-nanometer 5G baseband. The company promises enhanced performance and capacity for telecom firms. Mobile devices will benefit from higher 5G speeds. Samsung will make Qualcomm’s new chips.
In the first quarter, Qualcomm reported revenue of $5.1 billion. Non-GAAP earnings per share of 99 cents easily beat its guidance of 80 cents to 90 cents. For the second quarter, the company forecasts EPS in the range of 80 cents to 95 cents.
For the year, Qualcomm reiterated its plan to globally ship between 1.75 billion and 1.85 billion 3G, 4G and 5G devices. The company estimates that 5G devices will account for between 175 million and 225 million of the larger figure. Even if near-term demand temporarily slows, Qualcomm is unlikely to lower its full-year estimates. Pent-up consumer demand for 5G devices will offset any potential weakness in early sales.
Strengths and Risks
Qualcomm said that there are over 345 operators in around 120 countries investing in 5G technology. And since 45 operators have already launched 5G commercially, the rest of the industry cannot delay the implementation. Also, more than 45 original equipment manufacturers launched or announced commercial 5G devices. Since the majority of them are using Qualcomm’s Snapdragon platforms, holding Qualcomm stock will reward investors.
In the near term, seasonal weakness suggests that shipments will fall about 13%. But as the company ramps up new products with a more favorable product mix, the average selling price will increase.
Qualcomm also launched its premium-level and high-tier chips. These will help offset the decline in total unit sales. In addition, the 4G to 5G transition gives the company a chance to sell more content per chip. For example, the core chipset will have a radio frequency (RF) front-end platform. The RF portion of chip sales will contribute to more than 50% of the revenue growth.
But Qualcomm faces competition from other 5G chip suppliers, even as it remains ahead of the game. Having cycled through the second generation of Qualcomm 5G chips, its customers can gain comfort in the current design revision. And competition is always a risk factor.
Still, the company brushed off its competition when it said that “we’re not seeing anything on competition different than what we expected in our planning assumptions. So we expect QCT [Qualcomm CDMA Technologies] share to remain strong.”
Valuation and Price Target on Qualcomm Stock
Strong revenue expansion from the 4G to 5G industry transition suggests that Qualcomm should trade above its recent price-earnings multiple of 22 times. In a 5-year discounted cash flow revenue exit model, assume the following metrics:
| Metrics | Range | Conclusion |
| Discount Rate | 9%-10% | 9.5% |
| Terminal Revenue Multiple | 4x-5x | 4.5x |
| Fair Value | $85.36-$106.23 | $95.59 |
Data courtesy of finbox.io
Qualcomm stock trades at average valuation levels but fundamentally, the company scores well on quality.
It has a strong return on invested capital, a manageable debt-to-equity ratio (of 3.5 times) and a strong gross margin of 65.3%.
Qualcomm is a good core investment for technology investors. It has years of growth ahead and continues to generate strong profits for shareholders.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.
