Shares of Qualcomm (QCOM +3.23%) 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.
