Finance

Alberto Information Technology Project

2º E Degree in Business Administration and Management
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FINANCIAL POSITION OF:

QUALCOM
Álvaro Poness

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With a median price-to-earnings (or "P/E") ratio of close to 20x in the United States, you could be
forgiven for feeling indifferent about QUALCOMM Incorporated's (NASDAQ:QCOM) P/E ratio
of 19.6x. Although, it's not wise to simply ignore the P/E without explanation as investors may be
disregarding a distinct opportunity or a costly mistake.

QUALCOMM certainly has been doing a good job lately as it's been growing earnings more than
most other companies. One possibility is that the P/E is moderate because investors think this
strong earnings performance might be about to tail off. If you like the company, you'd be hoping
this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

QUALCOMM’S COMEBACK
After a tough couple of years marked by U.S.-China trade disputes and then the coronavirus
pandemic, Qualcomm (NASDAQ:QCOM) is back in growth mode. The leading mobile chip
designer reported a 52% rally in revenue to $7.94 billion during its fiscal 2021 second quarter (the
three months ended March 28, 2021), and net income surged 276% to $1.76 billion.

Consumers are back to purchasing smartphones again, and as they do so, devices equipped with 5G
network-capable chips are featuring prominently. It adds up to higher-value sales for Qualcomm as
the telecom industry enters a new era. But 5G is really only just the beginning.

The Qualcomm juggernaut is indicative of good things to come for the rest of the semiconductor
industry as well.

SPENDING IS UP ACROSS THE BOARD

Qualcomm's earnings results weren't just a rebound from depressed sales during the pandemic a
year ago. A global shortage of chips has emerged as all sorts of new consumer electronics and
industrial equipment is in demand of circuitry. That's great news for a company like Qualcomm.
The company's biggest end-market, smartphones, did account for most of the big jump in revenue
in Q2. However, it's getting plenty of lift from other areas of its business as well, like networking
equipment (included in RF front-end) and the automotive industry.

Qualcomm's forecast for the next quarter was pretty good too. Guidance includes its recently
completed $1.4 billion acquisition of CPU maker Nuvia, which it plans to use to expand into new
areas of the laptop and auto markets. At the midpoint of expectations, third-quarter 2021 revenue
should be $7.5 billion (up 53% year over year) and earnings per share should be $1.34 (up 81%).
This chip designer is well on its way to reaching new all-time highs for revenue and profitability as
strong demand for its mobility hardware lifts business.

GREAT IMPLICATIONS FOR CHIP

INVESTORS
Besides the positive implications for Qualcomm itself, the latest report card portends good things
for the chip industry overall in 2021 and beyond. Qualcomm is one of the largest semiconductor
businesses around, but it only makes money from the design of chips and licensing of technology
patents. Other companies handle actual fabrication of the chips. Qualcomm is thus a dog that wags
the chip fabrication tail, which bodes well for the largest fabricators like Taiwan Semiconductor
Manufacturing -- not to mention the outfits that supply chip fabs with the equipment they need.
Qualcomm's report indicates there will be no shortage of new business for these firms. Mobile
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phone and auto electronics supplier NXP Semiconductor, which Qualcomm attempted to acquire a
few years ago, similarly reported stellar results just a couple of days prior showing off a 27% year-
over-year sales increase.
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Qualcomm's takeover of Nuvia and its plans to expand in the CPU chip space also have greater
implications for the layout of the industry. Chipmaking giant Intel has had some stumbles in recent
years, and its massive business worth some $80 billion a year is up for grabs. Qualcomm is but one
designer trying to take a bite out of Intel's lead. AMD has been a pesky thorn in Intel's side for
years, and NVIDIA made its own announced foray into CPUs recently. Qualcomm's success as of
late, as mobility continues to expand and disrupt the computing industry status quo, forecasts great
things for its smaller peers, and poses divide-and-conquest risk for Intel.

One thing is clear: Qualcomm is participating in a new upcycle for semiconductors, and it's
showing no signs of slowing anytime soon. At just shy of 21 times trailing 12-month earnings per
share, this mobile chip leader is worth a Xlook.

What Are Growth Metrics Telling Us About The

P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like
QUALCOMM's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line.
although, its longer-term performance hasn't been as strong with three-year eps growth being
relatively non-existent overall. So it appears to us that the company has had a mixed result in terms
of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 0.2% per year during the coming three years
according to the analysts following the company. That's shaping up to be materially lower than the
15% per annum growth forecast for the broader market.

In light of this, it's curious that QUALCOMM's P/E sits in line with the majority of other
companies. It seems most investors are ignoring the fairly limited growth expectations and are
willing to pay up for exposure to the stock. These shareholders may be setting themselves up for
future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From QUALCOMM's

P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not,
it's quite a capable barometer of earnings expectations.

Our examination of QUALCOMM's analyst forecasts revealed that its inferior earnings outlook
isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with
the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long.
Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware QUALCOMM is showing 1 warning sign in our investment analysis,
you should know about.

If you're unsure about the strength of QUALCOMM's business, why not explore our interactive list
of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy
or sell any stock, and does not take account of your objectives, or your financial situation. We aim
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to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not
factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St
has no position in any stocks mentioned.

BIBLIOGRAPHY

https://www.nasdaq.com/

www.cnbc.com

www.yahoofinance.com

www.reuters.com

www.bloomberg.com

www.marquetwatch.com
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APPENDIX
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