Is Qualcomm Stock a Buy Now?

Qualcomm (QCOM 11.61%) recently posted strong first-quarter numbers and rosy guidance for its second quarter on Feb. 2. The mobile chipmaker's revenue increased 30% year over year to $10.7 billion, which cleared estimates by $270 million. Its adjusted net income grew 47% to $3.7 billion, or $3.23 per share, which also topped expectations by $0.23.

For the second quarter, Qualcomm expects its revenue to grow 29%-39% year over year, and for its adjusted EPS to rise 47%-58%. Analysts had expected its revenue and adjusted EPS to improve by 20% and 31%, respectively.

Those numbers were rock-solid, but they didn't meaningfully boost Qualcomm's stock price -- which remains down 2% for the year as of this writing. Let's see if investors should pay more attention to this underappreciated chipmaker.

Image source: Getty Images.

How fast is Qualcomm growing?

Qualcomm operates two main businesses: a chipmaking (QCT) segment, which produces its flagship Snapdragon system-on-chips (SoCs); and a licensing (QTL) segment, which generates licensing revenue and royalties from its massive portfolio of wireless patents.

Qualcomm generated 83% of its revenue from the QCT segment in the first quarter of 2022, and the remaining 17% came from the QTL segment. Here's how those two core businesses fared over the past year:

Data source: Qualcomm. *Non-GAAP basis.

The QCT business generated 68% of its revenue from the smartphone market during the first quarter. The rest came from its RF front-end chips (13%), automotive chips (3%), and Internet of Things (IoT) (17%) chips.

Qualcomm's smartphone chip sales rose 42% year over year, driven by brisk sales of its Snapdragon SoCs -- which bundle together a CPU, GPU, and baseband modem on a single chipset -- for new 5G devices.

Its RF front-end revenue rose 7% as it sold more 5G and Wi-Fi connectivity modules, and its automotive revenue grew 21% as it sold more chips for telematics platforms, digital cockpits, and advanced driver-assistance systems. Its IoT revenue surged 41% as it sold more connected laptop, edge networking, and industrial chips.

The QTL business, which gives Qualcomm a cut of every smartphone sold worldwide, was previously targeted by defiant OEMs and government regulators, which all claimed its licensing fees were too high. But Qualcomm settled most of those disputes, and that higher-margin business -- which accounted for a third of its pre-tax profits in the first quarter -- continued to expand as it collected fresh licensing revenue from new 5G devices.

Robust revenue growth and expanding margins

Qualcomm's revenue growth is gradually decelerating, but the secular growth of the 5G, connected vehicle, industrial, and IoT markets is enabling it to generate strong double-digit percentage sales growth on top of its double-digit percentage sales growth in 2021. As a fabless chipmaker, Qualcomm faces some supply bottlenecks related to the ongoing chip shortage, but it expects those headwinds to ease in the second half of 2022.

After rising 55% in fiscal 2021, analysts expect Qualcomm's revenue to grow 24% to $41.5 billion in 2022 before decelerating to 8% growth in 2023.

Qualcomm's earnings before taxes (EBT) margins also expanded sequentially and year over year in the first quarter. That expansion was driven by the QCT segment's rising margins, which CFO Akash Palkhiwala attributed to its improved "revenue scale and operating leverage."

Data source: Qualcomm.

For the second quarter, Qualcomm expects its EBT margins to dip sequentially -- but still potentially expand year over year -- to 32%-34% for the QCT segment and 70%-74% for the QTL segment.

Based on these expectations, analysts expect Qualcomm's adjusted EPS to grow 35% in 2022 and increase 7% in 2023. Those are solid growth rates for a stock that trades at just 18 times forward earnings.

Intel (INTC 6.79%), which is expected to grow at a much slower rate than Qualcomm for the foreseeable future, trades at 15 times forward earnings. Texas Instruments (TXN 0.87%), which is also growing at a slower clip than Qualcomm, trades at 21 times forward earnings.

Qualcomm also consistently returns its free cash flow to investors through buybacks and dividends. It's reduced its number of outstanding shares by 24% over the past three years, and pays a decent forward yield of 1.5%. That tight financial discipline should make Qualcomm an attractive "safe haven" stock as rising interest rates slam the tech sector's frothier growth stocks.

Is it the right time to buy Qualcomm?

Qualcomm is one of the few tech stocks I'd recommend buying in this volatile market. Its growth engines are still firing on all cylinders, it's gradually expanding into new markets, its margins are expanding, and it trades at a discount to many of its semiconductor peers. It might not be as exciting as the market's other high-growth stocks, but I'm fine with adding a little boredom and stability to my portfolio to cope with this unpredictable market.