In the past 30 days, 25 analysts have increased their EPS estimates for this tech company. The current annual dividend yield per share is 2.29%, paid quarterly.
Qualcomm Incorporated (QCOM)
From Cabot Stock of the Week
We’re not generally into mega-cap stocks that are well known and well followed. Surprises tend to be relatively minor, and their sheer size means you’re far more likely to get so-so performance than something truly noteworthy. However, there are exceptions to every rule (“the young man knows the rules, the old man knows the exceptions”), and we think Qualcomm (market cap of $122 billion) is one of them—thanks to some catalysts, it looks poised to be a magnet for institutional money flows in the months ahead.
The company, of course, has been one of the leaders of the wireless and smartphone revolution for the past two decades, operating out of two main segments. The first is its QCT operation, which is the “traditional” business, where Qualcomm supplies integrated circuits and software based on its CDMA technology for smartphones, tablets, laptops, wireless infrastructure (routers, network access points) and gaming devices. QCT makes up the vast majority of revenues, though margins here are so-so.
The other segment is dubbed QTL, which is basically Qualcomm’s licensing arm—it cuts deals with various firms (the big ones involve handset makers), allowing them to access the firm’s massive intellectual property portfolio … in exchange for royalties, of course. While QTL revenues are far less than QCT, cash flow is usually much larger.
Qualcomm’s overall position in the industry has helped it remain solidly profitable for years, and with high profit margins to boot (pre-tax profit margins usually in the 25% to 35% range). But growth has been a bugaboo for the past few years, partly due to management, partly due to industry ups and downs and partly due to never-ending lawsuits—sales and earnings both topped back in 2014!
However, that’s the past, and big investors are paying up for what looks like a very bright future. The first catalyst here is the general 5G revolution, including the surge in 5G smartphone sales that’s just beginning—in March, the firm’s chips were being designed into 375 different 5G devices, but as of last month, that figure had lifted to 660. And one of those 660 is Apple, thanks to the legal agreement the two companies hashed out last April that paid Qualcomm north of $4 billion and set the stage for royalties in the future.
And speaking of deals, that’s the second catalyst—when the company announced earnings a couple of weeks ago, it also revealed that it struck a deal with giant Huawei, which (like Apple) had been battling Qualcomm in the courts for a long time. For that, Qualcomm is getting about $1.8 billion of catch-up payments along with royalties going forward. As the CEO said, “With the signing of the Huawei agreement, we are entering a period where we have multi-year licensing agreements with every major handset maker.” And, again, this is happening just as the 5G boom is starting to take off.
The result should be a step function leap in earnings next year, with solid growth after that—analysts see Qualcomm earning $6.32 per share in the fiscal year beginning in October, up 62% from $3.89 this year. As a side benefit, that should also allow the company to return more money to shareholders via share buybacks or boosting the already solid dividend.
As for the stock, it topped back in 2014 around 80 and was in the doghouse for years; it looked to be getting going after last year’s Apple deal, but that move didn’t stick, either. But now QCOM has decisively busted loose, breaking out to all-time highs (even above its 2000 bubble peak) on solid volume. It won’t be the fastest horse, but we think QCOM will do well from here, and the recent wobble as growth stocks have hit a pothole offers a good-looking entry point. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, August 10, 2020