Share price of Qualcomm Inc. (NASDAQ:QCOM) has appreciated by 23.6% from its 52-week low of $53.09 touched in June 2012. At $65.64, the stock is trading near the 52-week high of $68.87 and offers a 1.5% dividend yield. There are 5 compelling reasons making me believe that Qualcomm's current price momentum may continue.
1. From a relative valuation perspective, Qualcomm's shares appear to be priced attractively based on the company's solid financials relative to its peers' (see chart below). Consensus estimates on average predict the firm's revenue, EBITDA, and EPS to grow at 2-year CAGRs of 15.4%, 19.8%, and 15.2%, respectively, generally outperforming the averages of 4.6%, 18.5%, and 18.9% for Broadcom (NASDAQ:BRCM) and Texas Instruments (NASDAQ:TXN). Similarly, Qualcomm's long-term EPS growth rate is forecasted to be 15.0%, considerably above the average estimate of 11.6% for the 2 comparable companies. On the profit side, Qualcomm demonstrates a superior performance as all of its profitability margins and capital return metrics are among the highest in the group. In terms of debt and liquidity, Qualcomm carries almost no debt and has a slightly above-average free cash flow margin. Both the firm's current and quick ratios are above par, reflecting a fortress-like balance sheet.
To summarize, given Qualcomm's superior financial performance in almost every aspect, I believe the stock should reasonably command a premium valuation over the peer-average level. Nevertheless, the current valuations at 10.4x forward EBITDA (next 12 months) and 14.6x forward EPS (next 12 months) together represent an average discount of 4.8% to the same average trading multiples for the peers, suggesting an undervaluation on a relative basis. Further, Qualcomm stock's PEG ratio at 0.98x is 39.5% below the peer-average PEG at 1.62x, again indicating a cheap valuation (see chart above).
2. Qualcomm's forward P/E multiple of 14.6x is currently trading at a 2.7% premium over the same valuation multiple of the S&P 500 Index, which stands at 14.3x now (see chart below). Investors should consider buying the shares at this relative valuation point provided that 1) the P/E multiple premium over the market averaged at 14.6% in the last 12 months; 2) Qualcomm's long-term earnings growth rate of 15.0% is almost twice of the average estimate of 8.2% for the S&P 500 companies; 3) Qualcomm has been able to sustain a market-leading profitability and free cash flow performance; 4) the firm possesses a significant market share in the mobile technology sector; and 5) the company is also committed to shareholder-friendly policies by paying out dividends and buying back shares.
3. Over the past 12 months, Qualcomm's forward P/E multiple has compressed by 10.7% from 16.4x to 14.6x at present (see chart below). Again, a great buying opportunity is presented given the following positive fundamental developments over the period:
a) The consensus revenue, EBITDA, and EPS estimates have experienced multiple upward revisions over the 12-month period (see charts below);
b) Sell-side analysts' average target price has increased by 8.0% from $69.09 in 12 months ago to $74.65 now (see chart below); and
c) Qualcomm has consecutively beaten the market's revenue and EPS expectations over the past 2 quarters.
4. From a technical standpoint, there appears to be a solid price support at the 250-day simple moving average level in the past 12 months (see chart below).
5. Sell-side analysts are very bullish on Qualcomm. According to Thomson One, of the total 43 stock ratings, there are 13 strong buys and 24 buys. In a research note dated February 6, 2013, Tim Long at BMO Capital Markets elaborated on his bullish view on Qualcomm's growth prospects which I tend to agree on (sourced from Thomson One, Equity Research):
"Qualcomm remains our top pick. In the near term, we see upside to estimates based on management's conservative view of December TRDS. We believe growing concerns about the saturation of the market and subsequent slowing of TRDS growth are unfounded. We estimate that TRDS, and therefore royalty revenues, will grow by a CAGR of 15% over the next four years. And from 2016 on, there is still the potential for double-digit growth based on just smartphones and tablets. While 3G and 4G are growing as a percentage of units, the underlying growth of the overall handset market is underappreciated, in our view. We believe the handset market will grow by 11% through 2016, which means that four years from now, less than 80% of total handset revenues will be royalty bearing to Qualcomm."
Bottom line, given the solid financials and the promising prospects, Qualcomm is well-positioned for a healthy long-term growth. Investors should consider acquiring the shares now in light of the discounted valuation level which substantially enhances the investment's margin of safety.