What happened
Shares of Qualcomm (QCOM 1.62%) are down 37.2% since the S&P 500 index peaked on Jan. 3, 2022, according to data from S&P Global Market Intelligence. The semiconductor giant's downtrend was quite relentless, as the stock price fell in nine of last year's 12 months.
With steady growth across the board and robust earnings reports all year long, Qualcomm didn't inspire this dramatic drawdown on its own. Instead, investors included this stock in the category of "high-risk growth stocks" as they reacted to macroeconomic challenges in 2022.
So what
You know the story of inflation concerns weighing on the stock market last year, and how the inflation-fighting increases of federal interest rates drove stocks even lower. Long-term medicine can hurt worse than short-term illness sometimes. Combined, these market-cutting economic trends weighed heavier on high-octane growth stocks with higher risks of ownership.
This makes sense at a high level, of course. Higher inflation leaves less money in consumers' pockets, which then leads to lower spending. At the same time, higher prices on everything from energy and transportation to staffing and raw materials will raise the costs of doing business.
That's bad news for bottom-line profits and cash flow generation. And then, if the economic pressure leads to a cash crunch, higher interest rates will make it harder to keep the lights on by raising more debt.
Furthermore, investors and financial analysts often use discounted cash flow models to determine the fair value of stocks. In that calculation, the long-term returns of any investment are reduced by a risk-free discount rate, which should go up when government-backed bonds come with higher interest rates. That shift makes growth stocks look like terrible investments for the long haul, due to greater risk-free returns and lower time value of those hard-earned revenue dollars.
So how does that combo of market risks relate to Qualcomm?
As a part of the tech sector in general, and the semiconductor industry in particular, Qualcomm often gets tagged as a high-risk investment. Stocks in this category tend to be volatile, rising or falling much faster than the broader stock market. The company also supported that view with a 32% year-over-year revenue jump in fiscal year 2022, which ended on Sept. 25. So far, the high-risk designation makes sense.
However, Qualcomm isn't some hot-shot growth phenom with negative earnings, limited cash, and a crushing debt load. Those soaring sales added up to $44.2 billion in 2022, powering $12.9 billion in bottom-line net profits and $9.1 billion of operating cash flow. With these robust cash profits and $6.4 billion of cash reserves and short-term investments, Qualcomm is unlikely to require more debt anytime soon (unless it wants to try a capital-intensive idea, such as acquiring a large company).
So when you dig below the surface, Qualcomm really shouldn't be lumped in with the risky market darlings of yesteryear. This is a mature business on a rock-solid financial platform, which still delivers 22% sales growth during a bear market.
Now what
That tried-and-true discounted cash flow calculation shows that Qualcomm is trading at an appropriate price today, if you assume zero bottom-line growth in the next five years and forever, with a 10% discount rate. If you lift the discount rate to 14%, to match the 4% increase in federal interest rates in 2022, Qualcomm would need to grow earnings by 8% per year over the next five years in order to support its current stock price. So the stock looks reasonably priced if you expect Qualcomm to deliver a modest rate of near-term earnings growth.
A quick check on Qualcomm's historical price-to-free cash flow ratios also supports this analysis, as the current valuation is very close to Qualcomm's average ratio in the last three, five, or 10 years:
QCOM Price to Free Cash Flow data by YCharts
In other words, Qualcomm may have been due for a price correction in 2022. Right now, you should consider the company's business plan and financial reports to determine whether you should buy, sell, or hold this stock. The macroeconomic market machinery appears to have played its part already.
From that perspective, you may want to pick up a few reasonably priced Qualcomm shares today. The company is a leader in 5G wireless networking technology, already working on the future of 6G networks, and bringing satellite-based phone networks to the mainstream market. Smartphone sales may have slowed down in recent years, but Qualcomm keeps finding ways to keep its phone-related revenue streams flowing anyway.
