Is Qualcomm Stock a Buy Now?

Qualcomm (QCOM 0.61%) posted a solid second-quarter earnings report on April 27. The chipmaker's revenue rose 41% year over year to $11.2 billion, which beat analysts' estimates by $600 million. Its adjusted net income surged 68% to $3.7 billion, or $3.21 per share, which also cleared analysts' expectations by $0.29.

However, Qualcomm's stock only rose slightly following its earnings beat and remains down more than 20% this year. Should investors buy some shares of this growing chipmaker as the market looks the other way?

Image source: Getty Images.

Another quarter of double-digit sales growth

During the second quarter (period ended in March), Qualcomm generated 86% of its revenue from its chipmaking (QCT) segment, which produces its Snapdragon system on chips (SoCs), baseband modems, radio frequency (RF) front-end chips, Internet of Things (IoT) chips, and automotive chips. The remaining 14% came from its licensing (QTL) segment, which generates royalties and licensing fees from its massive portfolio of wireless patents.

Its QCT revenue surged 52% year over year during the quarter -- on top of its 53% growth a year earlier -- and offset a 2% drop in its QTL revenues.

Data source: Qualcomm. *Non-GAAP basis. YOY = Year-over-year.

During the conference call, Qualcomm CEO Cristiano Amon said the QCT business saw "strength across the entire portfolio." Its handset revenues rose 56%, its RF front-end revenues grew 28%, its IoT revenues jumped 61%, and its automotive revenues increased 41%.

Handset chips still accounted for about two-thirds of Qualcomm's QCT revenues, but it's been aggressively expanding the other three businesses to become a more broadly diversified chipmaker like Texas Instruments (TXN 6.47%) or Broadcom (AVGO -0.03%). That diversification could insulate it from the saturated smartphone market's cyclical downturns.

In the third quarter, Qualcomm expects its total QCT revenues to increase 40% to 48% year over year as its rising IoT and auto revenues offset a "seasonal" slowdown in its RF front-end and handset chip sales.

Its QTL revenues dipped in the second quarter as global sales of lower-end smartphones slowed down. That deceleration didn't meaningfully affect its QCT business, which generates most of its revenue from higher-end smartphones, but it reduced its QTL revenues because it still takes a cut of every smartphone sold worldwide -- even if they don't use its chipsets.

It expects its QTL revenues to stay roughly flat year over year -- between a 6% decline and 7% growth -- in the third quarter as those headwinds persist. The recent COVID-19 lockdowns in China, which have reduced the country's production of lower-end handsets, could exacerbate that pressure.

Its margins remain stable

Qualcomm generated 78% of its earnings before taxes (EBT) from its QCT business during the second quarter. The rest came from the QTL business.

Its total EBT margin rose six percentage points year over year to 38% but dipped two percentage points from the first quarter. However, the EBT margins of both segments still remained broadly stable over the past year, even as the semiconductor sector grappled with shortages and supply chain challenges.

Data source: Qualcomm.

Qualcomm doesn't expect those issues to significantly affect its near-term growth. During the conference call, Amon said the company's "multi-sourcing and capacity expansion initiatives will continue to provide incremental improvements toward supply throughout the year."

For the third quarter, Qualcomm anticipates an EBT margin of 31% to 33% for its QCT business and an EBT margin of 69% to 73% for its QTL business. That year-over-year stability is impressive, especially considering its guidance factors in the current COVID-19 disruptions in China.

A bright outlook and a low valuation

Qualcomm expects its revenue to rise 31% to 41% year over year in the third quarter, and for its adjusted earnings per share (EPS) to grow 43% to 54%.

For the full year, analysts expect its revenue and adjusted EPS to increase 33% and 38%, respectively. Those growth rates will likely cool off next year, but its stock still looks cheap at 12 times forward earnings. Texas Instruments and Broadcom trade at 19 and 16 times forward earnings, respectively.

Qualcomm also pays an attractive forward dividend yield of 2.2%. That's a slightly lower yield than TI and Broadcom, but Qualcomm is also expected to grow significantly faster than both chipmakers this year.

Lastly, it repurchased $2.1 billion in shares and paid out $1.5 billion in dividends in the first half of fiscal 2021. Those consistent shareholder returns could make it a safe stock to own in this challenging market.

Is it the right time to buy Qualcomm?

Qualcomm is evolving into a more diversified chipmaker, but investors still value it as a cyclical one that is tethered to the smartphone market.

As a result, it looks undervalued relative to the secular growth of the 5G, IoT, and automotive chip markets. Investors who tune out all the near-term noise and buy Qualcomm's shares today will likely be well-rewarded when the market recognizes those strengths.