Qualcomm Overvalued, Even with the Nokia Settlement

At Valuecruncher we have long been an interested observer of Qualcomm (QCOM). QCOM designs, manufactures and markets digital wireless telecommunications products based on technology it has developed [CDMA]. QCOM is an example of a company that has successfully commercialised in-house developed intellectual property [IP].

This week QCOM announced the settlement of a long-running IP dispute with Nokia (NOK). Based on this settlement QCOM is trading at the top of the stock’s 52-week range. We decided to have a look at some projected financial numbers using our on-line valuation tool to see how the share price shapes up.

QCOM Valuation

QCOM grew revenues from $4.88 billion in 2004 to $8.87 billion in 2007 – a 22% compound annual growth rate. Our assumptions of revenues for the next three years are $10.5 billion in 2008 growing to $13.5 billion in 2010 – a 15% compound annual growth rate. We have projected EBITDA margins to grow from 40.0% in 2008 to 45.0% in 2010. We have used a terminal growth rate of 5%. We calculated this terminal growth rate based on year three growth of 11% dropping to a 4.5% stable growth rate by year 10.

We believe there is still considerable additional growth in mobile globally to come which QCOM is well positioned for. We used a terminal capital expenditure number of $1.0 billion. We have used a WACC (discount rate) of 10%.

Valuecruncher valuation model of QCOM with interactive assumptions

Our analysis incorporates the cash on the QCOM balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $45.11 per share which is 14% below the current share price of $52.43.

Based on our analysis the current share price looks overvalued. The Nokia settlement is good news but the QCOM share price looks expensive. Play with our assumptions – what does your analysis say?

Stock Position: None.

Comments

[onlythetruthhere]

You need to sharpen your pencil. Qualcomm earns over $2.75 Fiscal 09. 11 Billion in cash. Keep drinking the Nokia Kool-Aid and you will end up like the Ericcson Kool-Aid drinkers of the late 1990's. You only need to connect the dots, the facts are crystal clear, with or without Nokia.