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Summary

  • Consider that Qualcomm's P/E of 20 is still more than 23 points under the industry average.
  • Based on fiscal 2015 estimates of $5.71, that P/E drops 6 points to 14, which is still 1 point below Qualcomm's historical average.
  • On the basis of market share growth and expanding margins, these shares should trade at $90 by the second half of the year.

There's no question that Chipmaker Qualcomm (NASDAQ:QCOM) has been a standout performer within a sector that has struggled to find its footing. When compared to the beleaguered names such as Broadcom (NASDAQ:BRCM) and Advanced Micro Devices (NASDAQ:AMD), which have struggled amid weak volumes and device saturation, Qualcomm's world-class product cycle continues to impress analysts, including analysts at CLSA, who recently raised their price target on the stock from $82 to $90 per share.

Bears, nonetheless, argue that Qualcomm does not present value, given that the stock is merely a percentage point away from its 52-week high. But buying the stock at this level is about the long term. And ignoring the best chip stock on the market today (at any level) is equally foolish. With FQ2 report around the corner, the company will look to create more separation between itself and the rest of the pack.

In fact, in their research note, CLSA believes Qualcomm's first-quarter and second-quarter results will be inline with estimates. And according to their note, they see "meaningful margin upside in QCT from likely consolidation in the baseband industry." With its first-quarter report due out Wednesday, Qualcomm management will look to affirm exactly why I think this company has one of the best businesses in the entire market. Even better, it operates in a fast-growing industry.

The Street will be looking for earnings per share of $1.22 on revenue of $6.48 billion, which would represent a year-over-year revenue increase of roughly 6%. Earnings are expected to grow a little more than 4% year over year. Last year, the chip giant posted $1.17 in earnings per share. While this does not present breathtaking growth, they are modest enough that I'm willing go on record and guarantee that the company will beat these estimates.

Recall, back in January, Qualcomm posted a profit of $1.26 cents per share, which beat estimates by close to 7%. Not only that, but management was confident enough to boost annual profit forecast. Qualcomm is benefiting as more consumers worldwide choose phones that use its technology to connect to high-speed data networks, like the new long-term evolution (LTE) systems.

This strong global adoption helped the company post a strong beat in license revenue. Remarkably, this occurred amid slowing sales from Qualcomm's top two customers in Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF). To that end, given the expected growth and the market share gains Qualcomm has achieved from (among others) Broadcom and Lenovo (LNVY), I don't expect this momentum to fade. The Street understands this now.

What's more, the company continues to invest significant capital in developing a smartphone chip that works on multiple frequencies at the same time. You might have heard that Apple has finally struck its long-awaited deal with China Mobile (NYSE:CHL). An assist should be credited to Qualcomm's technology. For this reason, I'm amazed at how the company rarely (if ever) gets mentioned when listing some of the best brands and operations on the stock market.

When you consider that Qualcomm now controls the internal component space of approximately 275 million smartphones and other devices, it becomes clear just how underappreciated the stock has become. From an execution standpoint, management is operating on all cylinders. With the stock trading at around $80, I see a tremendous buying opportunity, even near 52-week high.

Consider Qualcomm's P/E of 20 is still more than 23 points under the industry average. And based on fiscal 2015 estimates of $5.71, that P/E drops 6 points to 14, which is still 1 point below Qualcomm's historical average. On the basis of market share growth and expanding margins, these shares should trade at $90 by the second half of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.

Source: Why Qualcomm Is Heading To $90