Thematic evaluation
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QUALCOMM, Inc. (QCOM)

September 06, 2024

Compared to: Texas Instruments Incorporated (TXN) | Advanced Micro Devices, Inc. (AMD) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Qualcomm appears moderately undervalued based on its strong financial performance, growth prospects in automotive and IoT markets, and leadership in 5G technology. While the P/E ratio suggests slight overvaluation, other metrics like EV/EBITDA and EV/Sales indicate undervaluation. The company's ability to successfully diversify and leverage its technological advantages could drive future value creation, outweighing the risks from customer concentration and geopolitical tensions.

Key takeaways
  • Qualcomm is a financially strong company with a robust liquidity position and a conservative capital structure.
  • The company's profitability is high, but it is facing challenges in controlling operating expenses, potentially due to investments in growth areas.
  • The company's revenue growth is slowing, potentially due to macroeconomic headwinds and competition in the smartphone market.
  • The company's strategic initiatives, such as its expansion into automotive technologies and IoT, are expected to drive future earnings growth and cash flow growth.
  • Qualcomm's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
  • Key metrics to monitor include revenue growth, gross margin, operating margin, net margin, net operating cash flow, free cash flow, and cash flow to net income ratio.
  • Qualcomm's valuation is generally in line with its peers, suggesting that the company is fairly valued.
  • The company's strong FCF generation capacity and its growth opportunities in automotive and IoT could potentially drive future valuation expansion.
  • Qualcomm's price performance has been mixed, with periods of outperformance and underperformance compared to its benchmark and peers.
  • The company's recent performance has been relatively stable, with decreasing volatility and moderate drawdowns. However, its recent underperformance compared to TXN raises concerns about its ability to maintain its competitive edge in the semiconductor market.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Qualcomm is a leading global provider of wireless technologies and semiconductor solutions, with a dominant position in the mobile industry and growing opportunities in automotive, IoT, and other emerging markets.
    • The company's core business model revolves around developing and commercializing foundational technologies for the wireless industry, including 3G, 4G, and 5G wireless connectivity, as well as high-performance and low-power computing including on-device AI.
    • Qualcomm's primary products and services include integrated circuit products sold through the QCT (Qualcomm CDMA Technologies) semiconductor business, which are used in mobile devices, automotive systems, and IoT applications, and licensing of the company's intellectual property portfolio, including patents, through the QTL (Qualcomm Technology Licensing) business.
    • The company's target market includes a small number of smartphone OEMs, particularly Chinese OEMs, as well as over 300 licensees.
    • Key competitors include Apple, Broadcom, MediaTek, Nvidia, NXP Semiconductors, Samsung, and others.
    • We are using the Technology Select Sector SPDR Fund (XLK) as a benchmark for price performance analysis and Advanced Micro Devices, Inc. (AMD) and Texas Instruments Incorporated (TXN) as industry peers for comparative analysis.

  2. Financial Performance:

    • Qualcomm's revenue has been declining in recent quarters, potentially due to macroeconomic headwinds and competition in the smartphone market.
    • The company's profitability is strong, as evidenced by its high Return on Average Assets (ROA), Return on Average Total Equity (ROE), Return on Average Total Capital (ROTC), and Return On Average Invested Capital (ROIC).
    • The company's profitability is being impacted by its strategic initiatives, such as its expansion into automotive technologies and IoT.
    • Qualcomm's profitability margins are expected to improve as it scales its operations and benefits from its investments in growth areas.
    • Compared to its peers, Qualcomm's profitability metrics are generally higher than AMD but lower than TXN. This suggests that Qualcomm may offer a balance between risk and return, but it is not as high-growth as AMD.

  3. Operational Efficiency:

    • Qualcomm's asset utilization efficiency is improving, as evidenced by the decreasing trend in accounts receivable and inventories.
    • The company's strong FCF margin indicates a consistent ability to generate cash flow from operations.
    • Qualcomm's cash flows from core business operations are increasing, driven by strong profitability and efficient working capital management.
    • The company's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
    • Qualcomm's capital expenditure has been decreasing in recent quarters, potentially indicating a slowdown in investments.
    • The company's dividend and share repurchase program is sustainable, supported by its strong FCF generation capacity.
    • Compared to its peers, Qualcomm's operational efficiency metrics are generally higher than AMD but lower than TXN. This suggests that Qualcomm carries a moderate level of risk compared to its peers.
    • Qualcomm's liquidity position is strong, with a significant amount of cash and short-term investments.
    • The company's long-term solvency is improving, with a decreasing debt burden.

  4. Growth Opportunities:

    • Qualcomm is expanding its technologies and products into new industries and applications beyond mobile handsets, such as automotive and IoT.
    • The company has completed the acquisition of Veoneer, Inc. to expand into automotive technologies.
    • Qualcomm is making progress in its strategic initiatives, including expanding its presence in industrial IoT and collaborating with key partners like Aramco, which could open up new avenues for growth.
    • The company's focus on diversification and its investments in emerging technologies like AI are positioning it well to capitalize on evolving market trends and drive long-term value for shareholders.
    • Management's historical execution of strategic plans has been mixed, with some successes and some challenges.

  5. Risks and Threats:

    • Qualcomm faces significant risks from customer concentration, particularly in the premium smartphone segment, as well as the threat of vertical integration by major customers developing their own integrated circuit products.
    • Navigating the complex geopolitical landscape, especially U.S./China trade tensions, is a major challenge for Qualcomm, as a substantial portion of its business is concentrated in China.
    • Extending its technologies and products into new industries beyond mobile handsets is a key growth strategy, but the company must overcome significant barriers to entry and successfully execute on these initiatives.
    • Qualcomm's strong patent portfolio and licensing business provide a steady revenue stream, but the company faces ongoing legal and regulatory challenges related to its licensing practices.
    • The company's financial performance has been impacted by macroeconomic headwinds, with revenues and profitability declining in fiscal 2023, though it maintains a robust liquidity position.

  6. Valuation Analysis:

    • Qualcomm's valuation metrics, such as P/E and EV/EBITDA, are generally in line with its peers, suggesting that the company is fairly valued.
    • The company's strong FCF generation capacity and its growth opportunities in automotive and IoT could potentially drive future valuation expansion.

  7. Price Performance:

    • Qualcomm's stock price has exhibited a mixed performance history compared to its benchmark and peers.
    • While it has outperformed XLK in the past year, it has underperformed in the past two and three years.
    • Compared to its peers, Qualcomm has outperformed AMD in most periods but has underperformed TXN in several instances.
    • Qualcomm's price performance has been more consistent in the longer-term periods (1 year, 2 years, and 3 years), suggesting that it may be a more stable investment option than AMD. However, its recent underperformance compared to TXN raises concerns about its ability to maintain its competitive edge in the semiconductor market.

  8. Future Outlook:

    • Qualcomm's management is forecasting continued growth in its automotive and IoT businesses, which could drive future revenue and earnings growth.
    • The company's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
    • Analyst estimates for Qualcomm's future performance are generally positive, with expectations for continued growth in its automotive and IoT businesses.

  9. Summary:

    • Qualcomm is a financially strong company with a robust liquidity position and a conservative capital structure.
    • The company's profitability is high, but it is facing challenges in controlling operating expenses, potentially due to investments in growth areas.
    • The company's revenue growth is slowing, potentially due to macroeconomic headwinds and competition in the smartphone market.
    • The company's strategic initiatives, such as its expansion into automotive technologies and IoT, are expected to drive future earnings growth and cash flow growth.
    • Qualcomm's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
    • Key metrics to monitor include revenue growth, gross margin, operating margin, net margin, net operating cash flow, free cash flow, and cash flow to net income ratio.
    • Qualcomm's valuation is generally in line with its peers, suggesting that the company is fairly valued.
    • The company's strong FCF generation capacity and its growth opportunities in automotive and IoT could potentially drive future valuation expansion.
    • Qualcomm's price performance has been mixed, with periods of outperformance and underperformance compared to its benchmark and peers.
    • The company's recent performance has been relatively stable, with decreasing volatility and moderate drawdowns. However, its recent underperformance compared to TXN raises concerns about its ability to maintain its competitive edge in the semiconductor market.
    • Qualcomm's management is forecasting continued growth in its automotive and IoT businesses, which could drive future revenue and earnings growth.
    • Analyst estimates for Qualcomm's future performance are generally positive, with expectations for continued growth in its automotive and IoT businesses.
    • Overall, Qualcomm is a well-positioned company with strong fundamentals and growth opportunities. However, investors should be aware of the company's risks, including customer concentration, geopolitical uncertainty, and competition.
Peer fundamentals 
Fundamentals
Insights
  • Qualcomm is a financially strong company with a robust liquidity position and a conservative capital structure.
  • The company's profitability is high, but it is facing challenges in controlling operating expenses, potentially due to investments in growth areas.
  • The company's revenue growth is slowing, potentially due to macroeconomic headwinds and competition in the smartphone market.
  • The company's strategic initiatives, such as its expansion into automotive technologies and IoT, are expected to drive future earnings growth and cash flow growth.
  • The company's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
  • Key metrics to monitor include revenue growth, gross margin, operating margin, net margin, net operating cash flow, free cash flow, and cash flow to net income ratio.
Analysis
  • Revenue - Revenue is decreasing, potentially due to macroeconomic headwinds and competition in the smartphone market. - The company's revenue growth is being impacted by the competitive landscape in the smartphone market and the transition to 5G technology. - The company's revenue growth is expected to stabilize and potentially accelerate in the future, driven by its expansion into new markets and its leadership in 5G technology.
    • Profitability
      • The company's profitability is strong, as evidenced by its high Return on Average Assets, Return on Average Total Equity, Return on Average Total Capital, and Return On Average Invested Capital.
      • The company's profitability is being impacted by its strategic initiatives, such as its expansion into automotive technologies and IoT.
      • The company's profitability margins are expected to improve as it scales its operations and benefits from its investments in growth areas.
    • Liquidity
      • The company's liquidity position is strong, with a significant amount of cash and short-term investments.
      • The company's strong cash and short-term investments provide significant financial flexibility.
    • Solvency
      • The company's long-term solvency is improving, with a decreasing debt burden.
      • The company's strong FCF generation capacity and decreasing debt burden suggest a healthy long-term solvency position.
    • Operational Efficiency
      • The company's asset utilization efficiency is improving, as evidenced by the decreasing trend in accounts receivable and inventories.
      • The company's strong FCF margin indicates a consistent ability to generate cash flow from operations.
    • Cash Flow Analysis
      • The company's cash flows from core business operations are increasing, driven by strong profitability and efficient working capital management.
      • The company's strong FCF generation capacity will support its debt repayment strategy, continued dividend growth, and investments in organic growth opportunities.
    • Risk Factors
      • The company's revenue growth is being impacted by the competitive landscape in the smartphone market and the transition to 5G technology.
      • The company is facing challenges in controlling operating expenses, potentially due to investments in growth areas.
      • The decreasing trend in fixed assets could indicate a potential slowdown in capital expenditures, which could impact future growth.
    • Future Outlook
      • The company's financial position provides flexibility for future investments, acquisitions, and shareholder returns.
      • The company's revenue growth is expected to stabilize and potentially accelerate in the future, driven by its expansion into new markets and its leadership in 5G technology.
      • The company's profitability margins are expected to improve as it scales its operations and benefits from its investments in growth areas.
      • Qualcomm's strategic initiatives, such as its expansion into automotive technologies and IoT, are expected to drive future earnings growth and cash flow growth.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison:
    • QCOM has exhibited a mixed performance history compared to XLK. While it has outperformed XLK in the past year, it has underperformed in the past two and three years. This suggests that QCOM's performance is not consistently better than the benchmark.
  • Risk and Return Analysis:
    • QCOM has provided higher annualized returns than XLK in the past year but has underperformed in the past two and three years. This indicates that QCOM's returns are not consistently higher than the benchmark.
    • QCOM has consistently exhibited higher annualized volatility than XLK, indicating a higher risk profile. This is further supported by the larger maximum drawdown experienced by QCOM.
    • QCOM's maximum drawdown of 44.29% in November 2022 is significantly larger than XLK's maximum drawdown of 33.56% in October 2022. This indicates that QCOM is more susceptible to market downturns and has a higher risk profile.
  • Risk-Adjusted Performance:
    • XLK has consistently offered a better risk-adjusted return than QCOM, as indicated by its higher Sharpe ratio. This suggests that XLK has been more efficient in generating returns relative to its risk.
    • QCOM's beta value of around 1.5 indicates that it is more sensitive to market movements than XLK, which has a beta of around 1.3. This suggests that QCOM's stock price is more likely to fluctuate more significantly than XLK's during market swings.
  • Overall Assessment:
    • QCOM has exhibited a mixed performance history compared to XLK, with periods of outperformance and underperformance. While it has provided higher returns in the past year, it has been more volatile and has experienced larger drawdowns than XLK. This suggests that QCOM carries a higher risk profile than XLK.
    • XLK has consistently offered a better risk-adjusted return than QCOM, as indicated by its higher Sharpe ratio. This suggests that XLK has been more efficient in generating returns relative to its risk.
    • QCOM's higher beta value indicates that it is more sensitive to market movements than XLK, suggesting a higher risk profile.
    • Investors seeking higher potential returns may consider QCOM, but they should be aware of its higher risk profile. Investors seeking a more stable and less volatile investment may prefer XLK, which has consistently offered better risk-adjusted returns.
Peers Price History(as of 2024-09-04)
Texas Instruments Incorporated (TXN)Advanced Micro Devices, Inc. (AMD)
  • Performance Comparison:
    • QCOM has exhibited a mixed performance history compared to its peers. While it has outperformed AMD in most periods, it has underperformed TXN in several instances. This suggests that QCOM's performance is more volatile than TXN's, but it has been able to outperform AMD consistently.
    • QCOM's performance has been more consistent in the longer-term periods (1 year, 2 years, and 3 years), suggesting that it may be a more stable investment option than AMD. However, its recent underperformance compared to TXN raises concerns about its ability to maintain its competitive edge in the semiconductor market.
  • Risk and Return Analysis:
    • QCOM has generally provided higher annualized returns than TXN, but lower returns than AMD. This suggests that QCOM may offer a balance between risk and return, but it is not as high-growth as AMD.
    • QCOM has exhibited higher annualized volatility than TXN, but lower volatility than AMD. This indicates that QCOM carries a moderate level of risk compared to its peers.
    • QCOM's maximum drawdown has been lower than AMD's, but higher than TXN's. This suggests that QCOM's risk profile is more moderate than AMD's, but less favorable than TXN's.
  • Risk-Adjusted Performance:
    • QCOM's Sharpe ratio has generally been lower than TXN's, but higher than AMD's. This suggests that TXN offers a better risk-adjusted return than QCOM, while QCOM offers a better risk-adjusted return than AMD.
    • QCOM's beta value suggests that it is more sensitive to market movements than TXN, but less sensitive than AMD. This indicates that QCOM carries a moderate level of risk compared to its peers.
  • Overall Assessment:
    • QCOM's performance has been mixed, with periods of outperformance and underperformance compared to its peers. While it has consistently outperformed AMD, it has underperformed TXN in several instances.
    • QCOM's risk profile is moderate, with higher volatility and drawdowns than TXN, but lower than AMD. Its Sharpe ratio suggests that it offers a better risk-adjusted return than AMD, but not as good as TXN.
    • QCOM's recent performance has been relatively stable, with decreasing volatility and moderate drawdowns. However, its recent underperformance compared to TXN raises concerns about its ability to maintain its competitive edge in the semiconductor market.
    • Investors seeking a moderate-risk investment with the potential for higher returns than TXN, but lower volatility than AMD, may consider QCOM. However, investors seeking a more stable and consistent investment with a higher risk-adjusted return may prefer TXN.
Peers Fundamentals(as of 2024-06-30)
Texas Instruments Incorporated (TXN)Advanced Micro Devices, Inc. (AMD)

  1. Market Position and Size:

    • QCOM is a smaller company in terms of market capitalization compared to its peers, AMD and TXN.
    • However, QCOM generates significantly higher revenue, EBITDA, and net income than its peers, despite having a smaller market cap.
    • This suggests that QCOM is a more profitable company than its peers, despite having a smaller market valuation.

  2. Profitability and Efficiency:

    • QCOM's profitability metrics, including Gross Profit Margin, EBITDA Margin, and Net Profit Margin, are significantly higher than both its peers and the industry average.
    • This indicates that QCOM is highly efficient in converting sales into profit.
    • QCOM's Return on Average Assets, Return on Average Total Equity, Return on Average Total Capital, and Return On Average Invested Capital are also significantly higher than its peers and the industry average, suggesting strong efficiency in generating returns.

  3. Financial Health and Stability:

    • QCOM's financial health is strong, characterized by high profitability, robust cash flow generation, and efficient returns.
    • However, QCOM's liquidity position is slightly weaker than its peers and the industry average, while its debt position is higher than AMD but lower than TXN and the industry average.
    • This suggests that QCOM has a moderate level of financial leverage and a slightly lower ability to meet its short-term obligations.

  4. Valuation and Market Perception:

    • QCOM's valuation metrics, such as Enterprise Value To Sales, Enterprise Value To EBITDA, Price To Earnings, and Price To Sales Ratio, are significantly lower than its peers and the industry average.
    • This suggests that QCOM is currently undervalued by the market compared to its peers and industry standards.

  5. Cash Flow and Capital Management:

    • QCOM generates significantly more cash from its operations and free cash flow compared to its peers, despite having a smaller market cap.
    • This demonstrates a strong ability to generate cash and invest in growth.

  6. Growth and Future Prospect:

    • QCOM's growth profile is characterized by strong profitability and cash flow growth, but relatively lower revenue and asset growth.
    • This suggests that QCOM is a highly efficient company that is focused on maximizing its profitability and cash flow generation.
    • However, the deceleration in revenue and asset growth could be a concern for investors, as it suggests that QCOM may be facing challenges in expanding its market share.

  7. Potential for Investment:

    • QCOM presents an interesting investment opportunity, characterized by its strong profitability, robust cash flow generation, and efficient returns.
    • However, its undervaluation and slower growth in revenue and assets warrant careful consideration.
    • Investors should monitor QCOM's growth trajectory and market share performance to assess the sustainability of its current profitability and cash flow generation.

  8. Key Risks and Considerations:

    • QCOM's slower growth in revenue and assets could indicate challenges in expanding its market share.
    • QCOM's undervaluation by the market could be a result of concerns about its growth prospects.
    • QCOM's slightly weaker liquidity position and moderate level of financial leverage warrant monitoring.

  9. Overall Assessment:

    • QCOM is a highly profitable and efficient company with a strong cash flow generation capability.
    • However, its growth in revenue and assets is relatively lower compared to its peers, and its valuation is significantly lower than both its peers and the industry average.
    • Investors should carefully consider QCOM's growth prospects and market share performance before making an investment decision.