One of the things that I like to do as an economist is to look for emerging trends and markets. For some, an emerging market means looking outside the borders of the U.S. or other, established market economies to areas of the world showing dramatic progress in terms of economic or political progress. For me, those kinds of emerging markets are hard to analyze, simply because the same kinds of analytical data generally isn’t readily available to the average retail investor. That means that it’s actually easier to try to think about nascent, emerging technologies or opportunities within existing segments of U.S. and global economy.
One of the areas that I think will offer the best opportunities in the next several years is in the telecommunications industry. That’s the long-anticipated buildout of 5G infrastructure, which will not only enable greater web-enabled functionality for consumers, but also act as the core infrastructure for Internet of Things (IoT) devices and communications in virtually every other sector of the economy. Qualcomm Inc. (QCOM) is one of the biggest investors in 5G technology, with thousands of patents already in place that make up the biggest portion of their business model.
Before this year, the stock was struggling, as conflict with Apple Computers, its biggest customer, extended to litigation over royalty payments for use of QCOM’s intellectual property, as secured by patents. AAPL had been actively looking for alternatives, including building out their own chips to reduce their reliance on QCOM, and as a result QCOM saw a big dip in revenues that had a lot of of investors on edge. Earlier this year, the two companies were finally able to reach an agreement and settlement – and that news, along with the expectation of continued progress in trade talks, seems to have given investors enough reason to push the stock up more than 50% from a 52-week low around $46.50. The question now for value-focused investors like me is, has the run pushed the stock too high to make it attractive as a long-term investment, or is there still a reasonable amount of opportunity left?
Fundamental and Value Profile
QUALCOMM Incorporated is engaged in the development and commercialization of a digital communication technology called code division multiple access (CDMA). The Company is engaged in the development and commercialization of the orthogonal frequency division multiple access (OFDMA) family of technologies, including long-term evolution (LTE), which is an Orthogonal Frequency Division Multiplexing (OFDM)-based standard that uses OFDMA and single-carrier Frequency Division Multiple Access (FDMA), for cellular wireless communication applications. The Company’s segments include QCT (Qualcomm CDMA Technologies), QTL (Qualcomm Technology Licensing) and QSI (Qualcomm Strategic Initiatives). The Company also develops and commercializes a range of other technologies used in handsets and tablets that contribute to end user demand. The Company’s products principally consist of integrated circuits (chips or chipsets) and system software used in mobile devices and in wireless networks. QCOM has a current market cap of about $97.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings more than tripled, while revenues declined by about -13.4%. The In the last quarter, earnings declined by about -76%, while sales decreased by -2.45%. The company’s margin profile is healthy, but has been narrowing; Net Income as a percentage of Revenues was 18% over the last twelve months and about 10.51% in the last quarter.
Free Cash Flow: QCOM’s free cash flow is healthy, at $6.4 billion over the last twelve months. This number translates to a Free Cash Flow Yield of about 6..2%.
Debt to Equity: QCOM’s debt/equity ratio is very high, at 2.74. The company’s balance sheet shows that they have about $12.2 billion in cash and liquid assets against $13.4 billion in long-term debt. That means that the company has plenty of liquidity to work with, with generally healthy operating profits as well.
Dividend: QCOM’s annual dividend is $2.48 per share, which translates to a yield of 2.9% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. QCOM has a Book Value of $4.30. That translates to a Price//Book value of 19.83, versus a historical average Price/Book ratio of 17.17, which means that the stock is about -14% overvalued right now. In addition, the stock is trading a little over -17% above its historical Price/Cash Flow ratio. Where is the bargain price? Somewhere between $56 and $70.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the stock’s upward trend from April 2018 to its recent peak this month around $94. The stock has retraced off of that level since then. Resistance is at a previous peak around $90 in May of this year, with support appearing to be right around $84 based on the stock’s consolidation of the last couple of days. If current support holds, and the stock picks up positive momentum, it should retest the $90 peak, while the stock’s current upward trend suggests its top could be at the 52-week high around $94. A drop below $84 could see the stock find its next support around $84 based on pivot highs in September around that level.
Near-term Keys: QCOM’s valuation metrics mean that there is no practical way to categorize the stock as a good value play, despite the general fundamental strength the company is showing right now. That doesn’t mean there isn’t opportunity to work with; but that opportunity really is best suited to short-term, directional based trades right now. If the stock can push a bit higher off current support, it could offer an interesting opportunity to buy the stock or work with call options, with a near-term peak at around $90, or possibly $94 if that momentum remains bullish. A drop below $84 could offer an interesting signal to short the stock or work with put options, with a near-term price target around $80 per share.