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Given Qualcomm's (QCOM) high margins and encouraging plans, analysts expect high growth rates for the company in the next five years. We maintain that QCOM, at its current price, is relatively undervalued, and consider this an ideal entry point to recommend the stock as a buy.

It has been a good time for Qualcomm shareholders, ever since Q3 results came out last month. The stock has appreciated by more than 11% after the Q3Q2012 earning release, on better than expected guidance for the next quarter. The company missed revenue and earnings forecasts for the last quarter by ~1% and ~4% respectively. The miss was associated with the shortfall in supply for chips (28 nanometer circuits).

Qualcomm is the market leader in next generation mobile technology and 3G, and it operates through three segments, namely Qualcomm CDMA Technology (QCT), Qualcomm Technology Licensing (QTL) and Qualcomm Wireless and Internet (QWI). QCT contributes a significant chunk to total revenue; nearly 62%, followed by QTL and QWI with 34% and 4% respectively. The future performance of the company relies on the QCT and QTL segments. The chips provided by QCT are used in devices (phones and tablets) offered by Apple (AAPL), Google (GOOG) and other smartphone makers. The smartphone market has potential to grow, and so do the sales of these chips. Smartphone sales are expected to increase in the last quarter of 2012 as new phones are set to be launched in the market.

Source: Fiscal 3Q2012 Earning Release.

Fiscal Q32012 performance was weaker than what was being forecast. Despite the revenue and earnings miss, the stock price experienced an appreciation on the news of a better ending to 2012. The stock price increased from $54.46 on the day of the 3Q2012 earnings release, to $62 as of yesterday.

Source: Yahoo Finance.

The company reported revenues of $4.63 billion and EPS of $0.85 for F3Q2012. The revenue grew by 28% YoY and dropped by 7% QoQ. EPS (non-GAAP) increased by 16% YoY.

(click to enlarge)

Source: Qualcomm.com

The Q3 chip shipment was 141 million, falling short of mean estimates of 148 million, meaning a 7% QoQ decrease and an increase of 18% YoY. Total reported device revenues were $47.8 billion, down 8% QoQ and up by 31% YoY.

(click to enlarge)

Source: Qualcomm.com

The share of emerging markets is growing for 3G/4G device shipments. Emerging market device shipments grew by 22% as compared to developed market shipments' growth of 7% YoY.

(click to enlarge)

Source: Qualcomm.com

The operating margin of 32% displays a strong performance. EBT margins for fiscal 3Q2012 were 16.5%, 88.3% and -3.8% for QCT, QTL and QWI, respectively.

Source: Fiscal 3Q2012 Earning Release and Qineqt estimates.

In recent times, excessive demand for 28 nanometer circuits led to a shortage. The demand for circuits is predicted to stay strong in the future, and the company is working with its circuit suppliers to manage and overcome the demand and supply gap. In the first quarter of FY2013, the circuit demand is expected to increase as new smartphones will be launched in December. The success of the QCT segment is associated with the success of devices to be launched in the holiday season. The growth estimates of 15% for the next five years are strong. Around the world, adoption of new technology (3G/4G) will provide growth for the company's circuit and licensing businesses.

There are a few factors that could adversely affect the company's future performance and on which investors should keep an eye. These include the global spending patterns, as most of the world economies are experiencing a recession; this could affect the sales of new smartphone devices to be launched in December, and eventually affect the company's QCT and QTL segments' performances. Secondly, the company should efficiently manage the supply of circuits to meet demand; otherwise, the company might miss out on future revenue and earnings estimates, which might signal a price drop.

Quarterly Revenue Growth (YoY)

Gross Profit Margin

Operating Margin

QCOM

28%

63%

32%

Broadcom Corp. (BRCM)

10%

50%

11%

Nokia Corporation (NOK)

-29%

29%

-1%

Texas Instruments Inc. (TXN)

-4%

50%

22%

Intel Corporation (INTC)

4%

64%

31%

Source: Yahoo Finance

Qualcomm's quarterly revenue growth and profit margins make it an attractive stock for investors. The company offers high quarterly revenue growth and higher margins in contrast to its direct competitors.

Currently, the company offers a dividend yield of 1.6% and a cash flow yield of 4.9%, indicating that QCOM will not have problems in maintaining its dividend yield in the future. Couple this with its low debt-to-equity ratio of 3.5%, compared to the industry average of 45%, and you get a healthy financial position.

P/E

QCOM

18x

BRCM

26x

TXN

22x

Motorola Solutions, Inc. (MSI)

23x

Source: Yahoo Finance

We believe the stock should trade at its competitors' P/E average of 23x. Based on the multiple, we estimate a price target of $94 per share for the fiscal year ended 2013. In a bullish scenario where the company would trade at its five-year P/E average of 25x, we calculate a price target of $102 for fiscal year 2013. Qualcomm's stock appears attractive for investors. According to future estimates and potential growth opportunities for the company, we recommend the stock as a buy.

Business Relationship Disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

Source: Why Is Qualcomm The Best-Positioned Technology Stock?