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Qualcomm Incorporated
Last Updated: 2 Nov 2022
NASDAQ: QCOM
GICS Sector: Technology
Sub-Industry: Semiconductors
Management
CEO: Cristiano Amon
Tenure: 1.4 years
QUALCOMM Incorporated's management team has an average tenure of 3.5 years. It is considered experienced.
Source of Revenue
QUALCOMM Incorporated engages in the development and commercialization of foundational technologies for the wireless industry worldwide.
Qualcomm technologies and products are used in mobile devices and other wireless products and are sold across industries and applications beyond mobile handsets, including automotive and the internet of things (IoT).
The company derives revenues principally from sales of integrated circuit products, including the Snapdragon® family of highly integrated, system-based solutions, and licensing of its intellectual property, including patents and other rights.
Qualcomm operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI).
The QCT segment develops and supplies integrated circuits and system software based on 3G/4G/5G and other technologies, including RFFE, for use in mobile devices, automotive systems for telematics, connectivity, and digital cockpit (also known as infotainment) and IoT including wireless networks, broadband gateway equipment, consumer electronic devices and industrial devices.
Qualcomm sells its QCT’s integrated circuit products and licenses its system software to manufacturers that use the products in a broad range of devices, from low-tier, entry-level devices primarily for emerging regions to premium-tier devices.
The Snapdragon family of highly integrated, system-based solutions include the Snapdragon mobile, compute, sound, and automotive platforms. Each platform consists of application processors and wireless connectivity capabilities. Snapdragon application processor functions include CPU, security, graphics, display, audio, video, camera, and AI. The CPUs are designed based on the ARM architecture and are designed to deliver high levels of computing performance with optimized power consumption.
Qualcomm’s portfolio of RF products includes Qualcomm RFFE components that are designed to simplify the RF design for 5G front-end, LTE multimode and multiband mobile devices, including sub-6 GHz and mmWave devices, to reduce power consumption and to improve radio performance.
The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of wireless products comprising products implementing CDMA2000, WCDMA, LTE and/or OFDMA-based 5G standards and their derivatives.
A significant portion of QTL’s licensing revenues is derived from licensees that have entered into license agreements that grant licenses under Qualcomm’s cellular standard-essential patents. Qualcomm licensees manufacture wireless cellular products such as mobile devices (including handsets), other consumer devices, plug-in end-user data modem cards and embedded modules for incorporation into machine-to-machine devices and certain end-user products (excluding handsets, tablets and laptops), connected vehicle units and connected vehicle modules used in automobiles, wireless access points, small cell wireless products, infrastructure equipment required to establish and operate a cellular network and equipment to test wireless networks and cellular devices.
The QSI segment invests in early-stage companies in various industries, including 5G, artificial intelligence, automotive, consumer, enterprise, cloud, and IoT, and investment for supporting the design and introduction of new products and services for voice and data communications, new industries, and applications. It also provides development, and other services and related products to the United States government agencies and their contractors.
A small number of customers/ licensees historically have accounted for a sizeable portion of Qualcomm’s consolidated revenues. In the fiscal year 2021, revenues from Apple, Samsung, and Xiaomi each comprised 10% or more of the total revenue.
Qualcomm Incorporated Economic Moat
Economic Moat: Narrow
There are many ways to identify Qualcomm Incorporated’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Qualcomm Incorporated. Please check my summary to understand more about the economic moat.
Performance Checklist
Is Qualcomm Incorporated’s revenue growing YoY for the past 5 years consistently? Inconsistent.
Is the net income growing YoY for the past 5 years consistently? Inconsistent.
Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.
Is the free cash flow positive for the past 5 years? Yes.
Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.
Is the EPS growing for the past 5 years? Inconsistent.
Is the free cash flow per share growing for the past 5 years? Inconsistent, rather cyclical.
Management Effectiveness
Is Qualcomm Incorporated’s ROE consistently at 12%-15% YoY for the past 5 years? Inconsistent.
Is the ROIC consistently at 12%-15% YoY for the past 5 years? Inconsistent.
The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.
Qualcomm Incorporated Financial Health
Current Ratio: 1.61 (pass my requirement of >1.0)
Debt-to-EBITA: 0.92 (pass my requirement of <3.0)
Interest Coverage: 29 (pass my requirement of >3.0)
Debt Servicing Ratio: 5.53% (pass my requirement of <30.0%)
Dividend
Current Dividend yield: 2.6%
Have the dividend payments been stable for the past 5 years? Yes.
Have the dividend payments been growing for the past 5 years? Yes.
Qualcomm Incorporated’s dividend payments are reasonably covered by its earnings and its cash flows.
Qualcomm Incorporated Valuation
Estimated intrinsic value: $130.29
Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.
Projected growth rate: 10% - 15%
Beta: 1.28
Discount rate: 8.4%
Date of calculation: 2 Nov 2022
My Top Concern
Qualcomm derives a sizable portion of its revenues from a small number of customers and licensees, particularly from their sale of premium-tier devices, and we expect this trend to continue.
In addition, several of Qualcomm’s largest integrated circuit customers have developed, are developing or may develop their integrated circuit products or may choose Qualcomm competitors’ integrated circuit products.
Any loss of significant customers, or a reduction in purchases whether due to the use of their integrated circuit products or Qualcomm competitors’ integrated circuit products, would impact the company’s profitability. Such a reduction in revenues would also impact Qualcomm’s cash resources available for other purposes, such as research and development.
The industry is also experiencing a concentration of device share among a few companies, and the corresponding purchasing power of these companies. This may result in lower prices for Qualcomm products which could impact the company’s revenues.
Another risk which affects Qualcomm’s economic moat is that some original equipment manufacturers (OEMs) avoid paying fair and reasonable royalties for the use of Qualcomm’s intellectual property.
From time to time, companies initiate various strategies to attempt to negotiate, renegotiate, reduce, or even eliminate the need to pay royalties to Qualcomm for the use of its intellectual property.
In addition, certain licensees have disputed, underreported, underpaid, or not paid royalties owed to Qualcomm under their license agreements.
We expect that such situations will continue in the future, and if successful, Qualcomm’s business model would be harmed, and its revenues could be negatively impacted.
In addition, the legal and other costs associated with defending Qualcomm’s position have been significant. Such legal challenges will continue into the foreseeable future and will require the investment of substantial management time and financial resources.
Summary for Qualcomm Incorporated
One strong determinant that gives Qualcomm its economic moat is its intangible assets. Qualcomm’s extensive inventory of patents in 3G, 4G, and 5G allows the company to charge device makers a royalty fee as a percentage of the price of each device sold. And as 5G smartphones continue to roll out in the coming years, we expect Qualcomm to benefit.
However, as mentioned in the above risk section, Qualcomm met with many regulatory investigations on how Qualcomm’s royalties should be based. Despite Qualcomm successfully defended its licensing business model as of 2021, any potential legal battle may lead to revisions in the royalty collection method. Likewise, Qualcomm’s Snapdragon application processors are commonplace in high-end Android smartphones, but OEMs have sought to replicate Apple’s strategy of developing in-house chips.
Qualcomm is aware of such threats and the fewer lucrative opportunities in the smartphone space. As such, the company starts to pivot into the non-smartphone areas such as automotive and the Internet of Things.
The automotive industry continues to adopt advanced connectivity and compute technologies from mobile. The digitalisation of the automotive cockpit continues to transform the in-vehicle experience, enabling greater personalisation of content. Car-to-cloud platform solutions are helping automakers improve cost efficiencies and receive valuable vehicle and usage analytics. Qualcomm patents around high-performance, low-power computing technologies from mobile have witnessed a strong pipeline of automotive design wins.
Similarly, in the IoT space, there is strong demand for connected devices beyond smartphones, edge networking and industrial applications. The installed base of IoT devices, which includes everything from wearables to industrial handhelds to gateways, is projected to more than double between 2021 and 2025 to over 27 billion. Trends such as remote working, distance learning and telehealth have also helped accelerate the adoption of fast, reliable wireless technologies and driven the demand for connected devices and networking equipment. Given Qualcomm’s expertise, such demands and trends present a huge opportunity for the company to capitalise on.
As Qualcomm’s intangible assets are the only outstanding determinant, I will only assign a narrow economic moat rating. The company lacks other areas such as creating a network effort and high switching costs.
Qualcomm’s performance is considered unsatisfactory and rather cyclical. Its revenue, net income and operating cash flow are inconsistent over the past 5 years. In the fiscal year 2018, Qualcomm recorded a net loss. Despite trends showing that Qualcomm’s revenue and net income have improved, I will still take a cautious approach.
Likewise, both Qualcomm’s ROE and ROIC may suggest that the company is not efficient in allocating its capital. Although its ROE is at an impressive level of above 100%, almost five times higher than its industry average, Qualcomm’s ROE is inconsistent over the past 5 years. Out of the recent 5 years, one year was below the minimum of 12% and another year recorded a negative ROE. Its ROIC follows a similar pattern too.
Qualcomm’s balance sheet looks healthy. The company passed all four of my debt requirements. Its current ratio, debt-to-EBITA and interest coverage ratio are all within the industry average as well. However, as Qualcomm’s equity dipped recently, it increased the debt-to-equity ratio to a considerably high level. It is also higher than the industry average.
With a narrow moat and inconsistency in Qualcomm’s performance and capital allocation, I will take a prudent approach by setting a higher margin of safety of 40%. So, with an estimated intrinsic value of $130.29, I will only invest when the stock price is trading in the $78 range.
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