When anyone thinks of the semiconductor industry, they are liable to think of one of two primary providers (though that has begun to shift in recent years). Those providers are either Intel or Qualcomm. However, unlike its compatriot, Qualcomm has not been suffering with innovation challenges, and has continued its leadership in the industry.
Qualcomm has always led the industry in innovation, as evidenced by the fact that it is arguably the biggest licenser of semiconductor tech in the world. With over 140000 granted & pending patents in over 100 countries, Qualcomm is able to leverage its innovation to provide over 5 Billion dollars in annual revenue through licensing. This generous compensation for innovation, while accretive to the bottom line, is more important in that it ensures that Qualcomm will always have sufficient investment to stay at the top of chip production, size & speed.
Qualcomm’s other big business segment is the design of their own chips, primarily their snapdragon series. Their newest Snapdragon 888 is a 5nm chip, and Qualcomm also leads in modems, automotive & many other applications. They have relationships with Apple, Windows, Android & essentially every major brand that consumes chips… Overall, they are arguably the leader in the semiconductor space when considered for sales & future growth.
This reality is best exemplified when we take a look at the valuation of the company. The company currently has a f p/e of around 14, and is expecting cagr in sales over the past two years of around 30% a year… This number is inflated due to the chip shortage & serious increase in technological demand spurred by the pandemic, and so post-pandemic, they are only expecting 10% annual sales growth… This is consistent with the growth & valuation of other defensive stocks like Caterpillar (though Qualcomm’s valuation is slightly lower). However, what is so impressive is the sustained growth after a 52% growth rate this coming year, as well as the fact that once you factor in the balance sheets, Qualcomm becomes even more undervalued, having a net positive cash balance, as opposed to Caterpillar’s over $10 Billion deficit. Additionally, since Qualcomm provides exposure to the growth of the tech industry, it traditionally trades at a premium, especially when we consider the pricing power gained by the global chip shortage. This reality is echoed by the comparative valuations of other big chip players:
Intel: 12-13 f p/e, with negative sales growth
Nvda: 50 f p/e, with similar current + next year growth
Amd: 35 f p/e, with slightly higher growth
Lam Research: 17 f p/e, for about half Qualcomm’s growth
Now, of course, as we can tell with this variety, depending on the segment of the chip market you’re in, your valuation can alter vastly - however, considering Qualcomm’s diversification, and predictability of cash flows, as well as its sever undervaluation compared to any of these companies, there is room for serious share price appreciation.
The final thing that we need to watch is the dividend. Qualcomm’s board seems incredibly committed to their dividend, with 18 years of consecutive raises & an over 2% payout (which while small is still above the s&p), make this a strong incentive to buy now & wait for the future share price appreciation.
In conclusion, I think Qualcomm is the best way to play the global chip supercycle we are likely entering at the conversion of the digital shift from covid & the transition to 5G… Additionally, its undervaluation in relation to its peers, and its dividend make it a great opportunity as a long-term investment. Finally, despite its substantial share price gain over the past year, the substantial recent correction provides an attractive buy point!
By: Mateo Gjinali
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