It's been a tumultuous few years for Qualcomm (QCOM 2.63%). Its bid to take over peer NXP Semiconductors was blocked by China; there have been patent and licensing disputes with Apple (AAPL 1.45%) (which it resolved in 2019) and with Chinese tech titan Huawei (a new long-term agreement is still pending); and the trade war between the U.S. and China has been the source of frequent worry. Then there's the coronavirus. Tech researcher IDC thinks global smartphone sales could drop 12% in 2020 as a result of the pandemic.
That's quite the laundry list of negative headwinds. It's no wonder Qualcomm stock is up just 37% in the last trailing five-year period, compared to a 177% return for the PHLX Semiconductor Sector Index. But Qualcomm could be in for a rebound in the next couple of years as a new era of mobility fueled by 5G gets underway.
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Not insurmountable challenges
After a decade-plus of booming mobility that has made the smartphone an essential piece of equipment, that industry has matured and slowed. Qualcomm's sales have followed suit and have been stuck in a rut for the last five years. Nevertheless, this is still a force to be reckoned with. The company's Snapdragon mobile processors and connectivity chip designs are prolific (the segment Qualcomm calls QCT). Additionally, the licensing segment (or QTL) allows manufacturers to use Qualcomm's mobile patents and earns a fee every time a smartphone is sold. It's a powerful business model, and the two segments together put up impressive profit margins -- although the far smaller QTL segment accounts for most of pre-tax earnings.
|
Six Months Ended March 29, 2020 |
QCT |
QTL |
|---|---|---|
|
Revenue |
$7.72 billion |
$2.48 billion |
|
Earnings before taxes (EBT) |
$1.15 billion |
$1.69 billion |
|
EBT profit margin |
15% |
68% |
Data source: Qualcomm.
Though it has come under fire in recent years, the company has been able to use its hefty margins to innovate. Some of its more recent advances have taken its mobility chip platform and applied it to other devices like wearables (smartwatches and headphones), virtual reality headsets, laptops, industrial equipment, and cars. Thus, even with smartphone sales struggling amid COVID-19, Qualcomm has other irons in the fire.
That translated to a decent outlook for third-quarter fiscal 2020 (the quarter ending in June 2020), given the current state of global affairs. Total revenue is expected to be $4.4 billion to $5.2 billion, compared with $4.9 billion in the same period in 2019 (excluding the one-time $4.7 billion payment from Apple after litigation was dropped). And adjusted earnings per share are expected to be $0.60 to $0.80 in Q3 2020 compared to $0.80 a year ago.
With the bulk of the current pandemic-fueled crisis occurring in Qualcomm's fiscal Q3, it could be a trough from which future results rebound. Further down the line, 5G mobile networks -- the global rollout of which is also seeing delays due to the coronavirus -- should also help Qualcomm return to growth. A wave of new phones with 5G-enabling chips will need to be sold, and the company has also developed hardware to help mobile service providers themselves build the new network infrastructure. Thus, for investors looking to cash in on the 5G movement, Qualcomm is a top stock to start with.
Not exactly a growth story anymore
Granted, Qualcomm is already a massive company with a market cap of $100 billion. And in the 5G race, there are other smaller names vying to sell next-gen networking equipment. Put another way, I don't think Qualcomm will be the high-growth stock it was in times past when it had a stranglehold on the booming smartphone market.
Nevertheless, though the top line may offer up tepid growth going forward, profits are expected to rally as the company starts to reap the rewards from its 5G and other mobile chip development. The stock trades for 26.5 times trailing 12-month earnings per share, but just 15.3 times expected one-year forward earnings per share -- implying about a 40% jump in the bottom line in coming quarters.
Also fueling that bottom-line rebound is Qualcomm's share repurchase program ($1.6 billion in stock was purchased in the second quarter alone). Ongoing buybacks reduce share count, which boosts earnings per share for shareholders. The dividend also currently yields 3% a year, a more than respectable payout, especially when adding it to the share repurchase program. And with $9.95 billion in cash and equivalents and $15.9 billion in total debt, the balance sheet is in decent shape as well.
It's not my favorite semiconductor stock, but Qualcomm looks like a reasonable value and one of the better ways to invest in 5G. Putting away some of the headlines weighing on it from the last few years will go a long way toward helping the stock rally too. For investors looking for a balance between slow and steady growth and income, this technologist is a worthwhile addition.
