Does Qualcomm Stock Still Have Room to Run?

With Qualcomm outperforming the Nasdaq over the last year and year-to-date, does the stock still have room to run?

Jun 17, 2014 at 11:45AM

Shares of Qualcomm (NASDAQ:QCOM) have performed well over the last year, gaining 28.89% against a NASDAQ up 25.91%. As a more apropos comparison, while the NASDAQ has only gained 3.20% year-to-date, Qualcomm has surged 6.54%. While the stock has outperformed so far, does the company have continued room to run as we get into the back-half of the year and beyond?

Qualcomm's two businesses – technology licensing and chips
While many often approach Qualcomm strictly as a wireless chip designer (its processors are found in most of the world's mobile phones and increasingly in tablets), its business is actually composed of two distinct, and yet very wireless-focused, businesses.


Qualcomm's iconic Snapdragon powers many of the world's leading handsets. Source: Qualcomm.

First up is Qualcomm CDMA Technologies ("QCT") which is responsible for the development of semiconductor solutions for smart, connected devices. This includes both stand-alone baseband and RF chips, as well as highly integrated applications processors with that leading mobile technology. On top of that, Qualcomm has recently been looking to expand silicon content share in devices, aggressively pursuing connectivity (Wi-Fi, Bluetooth, etc.) as well as RF front end with RF360.

Next is Qualcomm Technology Licensing ("QTL") which essentially involves the license of and collection of royalties on devices that implement key wireless standards such as CDMA and LTE. With an extensive patent portfolio covering the gamut of wireless technologies, the company gets to collect a nice royalty (of roughly between 3% and 5%) on the sale of just about every 3G and/or 4G capable device sold on the market. Double dipping at its finest.

What's the story?
The "big picture" story for Qualcomm is that as smartphone penetration continues, more devices will shift from 2G to royalty-bearing 3G and/or 4G devices. Royalties are essentially 100% gross margin, so they flow very nicely to the bottom line.


Qualcomm's licensing business is a proverbial goldmine. Source: Qualcomm.

As far as chips go, Qualcomm is set to ride the secular growth tide in phones and tablets, while at the same time is capturing content share (such as connectivity) in the low-end/mid-range of the market from the likes of Broadcom (NASDAQ:BRCM). While Broadcom seems to be doing an excellent job fending Qualcomm off at the high end, the mid-range and low-end seem to be going to either Qualcomm or MediaTek (which is something Broadcom expects, but still isn't all that happy about).

Valuing the business and arriving at a price target
If we assume that Qualcomm can grow earnings at roughly a 10% CAGR (per the company's most recent analyst day) over the next five years, and then assuming an "exit multiple" (i.e. the expected price-to-earnings ratio of the stock after those five years) of about 15 times, then the underlying business itself (net of cash/debt) looks to be worth about $105 billion.


Source: Qualcomm.

Adding back the company's $32 billion cash hoard in net cash (Qualcomm has no long term debt) suggests a market capitalization of $137 billion -- or a stock price of about $81/share -- not a whole lot of upside from the approximately $79/share that the stock trades at today. 

However, if we assume more aggressive earnings growth rates of between 11 and 12 percent, and if we use the same exit multiple, then the stock could be worth anywhere from $84 to $87 per share. This still isn't a tremendous amount of upside, but for a stable, relatively safe large-cap tech name with a large moat, this isn't bad. 

Foolish bottom line
Qualcomm's shares look fairly valued here. Now, does this mean that if I owned Qualcomm shares at a lower price that I'd be in a rush to sell them? No – this is a high quality business that should continue to grow over the long run (as should the dividend). However, for fresh money, there are probably better risk/reward opportunities at this time, although this is definitely a stock that should be on every tech investor's watch list in case a buying opportunity presents itself. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information