Can Qualcomm Stock Rebound To $150? (NASDAQ:QCOM)

Qualcomm Office Building in San Diego, California

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I rate QUALCOMM Incorporated’s (NASDAQ:QCOM) stock as a Buy.

My prior article for QCOM was written on October 21, 2021, which discussed how QUALCOMM Incorporated had dealt with the semiconductor chip supply issue with its “multi-sourcing approach.” This latest update touches on the prospects of a rebound in QCOM’s share price going forward.

I have upgraded my rating for Qualcomm Incorporated from a Hold to a Buy. In my view, QCOM’s valuations are attractive and have not priced in the company’s progress in business diversification. Moreover, I think that Qualcomm Incorporated’s shares can easily rise as much as +20% to $150 in the future, which justifies my Buy rating for QCOM.

QCOM Stock Key Metrics

QUALCOMM Incorporated disclosed certain key metrics when the company announced its most recent Q3 FY 2022 (YE September 30) financial results in late-July 2022. In my opinion, there are a couple of positive takeaways from QCOM’s key metrics.

Firstly, QCOM’s non-GAAP adjusted earnings per share or EPS jumped by +54% YoY from $1.92 in Q3 FY 2021 to $2.96 in Q3 FY 2022, as indicated in its most recent quarterly earnings press release.

More significantly, QUALCOMM Incorporated’s actual Q3 FY 2022 bottom line was +3% higher than the sell-side’s consensus EPS forecast of $2.87. The earnings beat for QCOM in the third quarter is largely attributable to the fact that its core Handsets business performed above expectations.

Revenue for QCOM’s Handsets business expanded by +59% YoY to $6,149 million in the third quarter of fiscal 2022, and this was approximately +3% better than Wall Street’s consensus Handsets topline estimate of $5,993 million as per S&P Capital IQ. QUALCOMM explained at the company’s Q3 FY 2022 earnings briefing that “our strategy of being focused on the premium and high tier (of handsets) is proven to be a resilient one.”

Secondly, QUALCOMM’s licensing business, otherwise referred to as QTL, offers stable and recurring licensing revenue for the company. As such, it is encouraging that QCOM highlighted in its Q3 FY 2022 results media release that it has successfully negotiated for an “extension of our patent license agreement with Samsung (OTCPK:SSNLF) (OTCPK:SSNNF).”

At its Q3 FY 2022 investor call, QCOM revealed that the “patent license agreement with Samsung” will now expire in end-2030, instead of end-2023 prior to the extension.

Thirdly, QCOM reiterated its earlier view that “demand and supply” should “reconcile in the second half of calendar year” 2022 at its third-quarter investor briefing.

This suggests that lead times should decline and normalize going forward, with supply chain constraints expected to become less of a headwind for QUALCOMM in the near future.

What Was Qualcomm’s Highest Stock Price?

QUALCOMM’s shares last traded at $124.89 as of October 5, 2022.

The highest stock price that QCOM has ever reached was $193.58 on January 5, 2022 during intra-day trading. In other words, QUALCOMM’s last done stock price is -35% lower as compared to its all-time share price peak achieved at the start of this year.

Investors are worried about how the weak macroeconomic environment might affect the short-term performance of QUALCOMM Incorporated and in particular, its core Handsets business. The market’s fears were validated to some extent with QCOM’s Q4 FY 2022 revenue guidance of $11.0-$11.8 billion coming in slightly below the analysts’ consensus topline projection of $12.0 billion as per S&P Capital IQ. This is the key reason for QCOM’s share price correction from its historical share price high.

What Is The Target Price For QCOM?

The sell-side analysts are largely bullish on QCOM’s stock price outlook as seen with the consensus price targets for the company’s shares.

According to consensus financial data taken from S&P Capital IQ, the mean and median sell-side target prices for QUALCOMM are $181.97 and $175.00, which translate into potential upsides of +46% and +40%, respectively.

Notably, even the most “bearish” analyst covering QCOM’s stock has assigned a price target of $130.00. This lowest target price on the Street is still equivalent to a capital appreciation potential of +4% for QCOM.

Can QCOM Stock Rebound To $150?

$150 is a good benchmark to use in evaluating QCOM’s stock price outlook, as this is equivalent to a capital appreciation potential of +20% which is roughly the required return for a Buy rating in my opinion.

I am of the view that QUALCOMM’s shares should be able to rebound to $150.

QCOM trades at 9.8 times consensus forward next twelve months’ normalized P/E now based on valuation data sourced from S&P Capital IQ. This is only about +10% higher than Qualcomm’s 10-year historical P/E trough of 8.9 times, and -36% lower than its 10-year historical P/E mean of 15.4 times.

Qualcomm’s current valuations are also appealing as compared to its key financial metrics. As per S&P Capital IQ, QCOM is expected to deliver reasonably good ROAs (Returns on Assets) above 23% in every year for the FY 2022-2024 period. Also, the market consensus sees Qualcomm still generating positive normalized EPS growth for both FY 2023 and FY 2024, even though FY 2021 and FY 2022 were exceptional years for QCOM and technology companies in general.

A $150 price target translates into a consensus forward next twelve months’ normalized P/E multiple of 11.8 times, which isn’t very demanding.

Is Qualcomm A Good Long-Term Stock?

In my view, Qualcomm Incorporated is a better long-term stock than what investors give it credit for, as evidenced by QCOM’s current valuations discussed in the preceding section.

QCOM’s efforts to diversify beyond its core Handset business continued to pay off in the most recent quarter. In Q3 FY 2022, the Automotive, IoT (Internet of Things), and RF front-end businesses achieved positive YoY revenue growth rates of +38%, +31%, and +9%, respectively. This implies these non-Handset businesses contributed as much as 30% of the company’s revenue for the most recent quarter.

Looking ahead, I expect non-Handset businesses to contribute a growing proportion of Qualcomm’s topline and earnings in the future. Specifically, the Automotive business has the most promising outlook.

In its Q3 FY 2022 results presentation slides, QCOM highlighted that its “design-win pipeline” for the Automotive business has increased from over $16 billion previously to in excess of $19 billion as of late-July 2022. In just three months, Qualcomm provided another update in late-September 2022 revealing that the Automotive business’ “design-win pipeline” has further expanded to $30 billion. Also, QCOM guided that it expects revenue for the Automotive business to grow from $975 million in FY 2021 to more than $4 billion and $9 billion for FY 2026 and FY 2031, respectively.

In a nutshell, Qualcomm is a good long-term investment candidate, as its valuations should re-rate over time as the company diversifies its revenue base and reduces its dependence on the Handset business going forward.

Is QCOM Stock A Buy, Sell, Or Hold?

I rate QCOM’s stock as a Buy. Qualcomm’s current valuation multiples are low relative to historical averages, and the market doesn’t give QCOM sufficient credit for the company’s diversification efforts.

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