Qualcomm: The world's largest startup company.
The headline is a quote from the CEO in the latest annual meeting, and not one I came up with myself. And the CEO could very well be right as Qualcomm is growing in different sectors. Qualcomm has executed very well lately and has been on my radar for quite some time. The question is if now is the time to buy Qualcomm?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Qualcomm. If you would like to know what I have in my portfolio, or you want to copy it, you can read how to do so here. I don't have much exposure to semiconductors and only own Intel for the time being. However, I do think semiconductors will shape the future and it is a sector I'm investigating now. As always, I will try to keep the analysis unbiased.
Qualcomm was established in 1985, and is an American company that creates semiconductors, software, and services related to wireless technology, while they also own patents. Their business can be divided into two business segments. The largest is Qualcomm CDMA technologies (QCT). QCT develops and supplies integrated circuits and system software based on 3G/4G/5G and other technologies for use in mobile devices, wireless networks, devices used in internet of things, broadband gateway equipment, consumer electronic devices and automotive systems for telematics and infotainment. Approximately 83 % of their revenue comes QTC. Their other segment is Qualcomm technology licensing (QTL). QTL grants licenses or otherwise provides rights to use portions of their intellectual property portfolio which includes certain patent rights essential to and/or useful in the manufacture, sale and/or use of certain wireless products. QTL delivers approximately 17 % of the revenue. Qualcomm also has a third segment called Qualcomm strategic investments (QSI). QSI makes strategic investments, but it is a much smaller segment. They are known for their Snapdragon brand, and the Snapdragon brand value alone would place it within Interbrand's top 100 brands. Qualcomm cooperates with some of the largest companies in the world, such as Microsoft, BMW, Samsung, and Walmart to mention a few through different sectors. And it is enough for me to determine that Qualcomm has a strong brand moat.
Their CEO is Cristiano Amon. He joined Qualcomm in 1995 as an engineer, became the CEO in late June 2021. Prior to joining Qualcomm, he held positions in Vésper, NEC, Ericsson and Velocom. He holds a Bachelor of Science degree in electric engineering and an honorary doctorate from Universidade Estadual de Compinas, São Paulo. He was elected to be CEO because he has a track record of successful execution, deep company knowledge, a strong relationship with Qualcomm's partners and the vision to bring Qualcomm forward. Some examples of this are that he has been credited for Qualcomm's expansion beyond mobile phones. He has been described as gregarious, passionate, and optimistic about everything, and is known for quoting racing driver Mario Andretti saying, "if everything seems under control, you are just not going fast enough". Since Cristiano Amon has been the CEO for less than a year, it is difficult to make any judgement of him as a CEO. However, he certainly has the credentials and experience to be able to move Qualcomm forward. I have already read in an article that he has been called Qualcomm's Satya Nadella (the CEO of Microsoft), as Cristiano Amon had vast experience from different positions within the company before becoming CEO. Nevertheless, I would feel comfortable in investing in Qualcomm with Cristiano Amon as CEO.
I believe that Qualcomm has a strong brand moat. I'm confident in the management as well. Now let us investigate the big five numbers to see if Qualcomm does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. The numbers are above the required 10 % in all the benchmarks, which is very nice to see. Qualcomm especially deliver great numbers in the last two benchmarks. I would happily invest in a company with such a ROIC.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. The first three benchmarks are a bit underwhelming. However, like we saw above, Qualcomm delivers some great numbers in the last two benchmarks. While I would like to see better numbers in the older benchmarks, it doesn't turn me off from investing in Qualcomm.
The next numbers are the EPS Growth Rates. Again, we see the same pattern as in the other numbers we have looked at so far. The older numbers are smaller than the last two benchmarks. The older numbers are by no means disastrous, and I wouldn't be concerned by these numbers, and they won't keep me from investing in Qualcomm.
The Equity Growth Rate is also known as the most important of the four growth rates. Here we see some negative numbers for the first time. In the older benchmarks Qualcomm doesn't deliver as you would like. However, the last two benchmarks are fantastic. I would say that the last two benchmark more than make up for the bad numbers in the first three benchmarks, and I would still invest in Qualcomm based on these numbers.
Finally, we investigate the Cash Growth Rates. These numbers are like all the other numbers. The first three benchmarks Qualcomm delivers underwhelming numbers, while they deliver fantastic numbers in the latest two benchmarks. And like with the other numbers, the last two benchmarks are enough for me to make up for the older benchmarks.
To shortly summarize the five numbers from Qualcomm. The most important number is always the ROIC, and Qualcomm delivers a ROIC that is above the requirement in all the benchmarks, which is very encouraging. The four growth rates all have the same patterns. The sales growth rate, the EPS growth rate, and the cash growth rate all deliver underwhelming numbers in the three oldest benchmark and great numbers in the latest two benchmarks. The equity growth rate follows the patterns of the other growth rates but is the only growth rate with negative numbers. If I was to invest in Qualcomm, I would invest in Qualcomm of today and not Qualcomm five years ago. It certainly looks like Qualcomm has momentum and have had it for the last three years. Hence, I would be confident in investing in Qualcomm based on the historic numbers.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculations on Qualcomm, it shows a debt that can be paid off in 1,52 years. It is acceptable and debt won't keep me from investing in Qualcomm.
Like with all other companies, there are some risks you need to consider, if you are going to invest in Qualcomm. Economic downturns. Qualcomm operates in consumer business, and if we see economic downturns around the world, people will buy less products that uses Qualcomm products. If less Qualcomm products are sold, it would hurt both their balance sheet. Supply chain shortages. Qualcomm is also hurt by supply chain shortages, and in the latest conference call, CEO Cristiano Amon said: "We have more demand than supply across all business". If these supply chain shortages continue, it could hurt the growth of Qualcomm as they cannot deliver the number of products that are needed. Competition. Qualcomm operates in an industry that is subject to intense competition and rapid technological change. And their future success depends on them being able to adapt to these changes. If they are not able to adapt to these changes, it could decrease demand or prices for their products. Their customers will develop their own products. It is a possible that their customers decide and may succeed in developing their own integrated circuit products, as Apple did. Furthermore, China targets 70 % semiconductor self-sufficiency by 2025, and a significant portion of Qualcomm's revenue is derived from Chinese manufacturers.
It isn't all risks, there are also a lot of potential for Qualcomm moving forward. Qualcomm is growing. Qualcomm has revealed that their three years financial targets for the QCT segment to grow their revenue by mid-teens CAGR, while delivering in a +30 % operating margin. The Metaverse. Qualcomm is already works with both Microsoft and Meta regarding the Metaverse. Qualcomm CEO Cristiano Amon is more bullish on the Metaverse than most others and has said: "The Metaverse could be as big as the smartphone itself", when it comes to Qualcomm's future in the Metaverse. Cloud. The cloud computing market is expected to grow by 16,3 % CAGR worldwide by 2026. People might not think about Qualcomm when it comes to cloud, but CEO Cristiano Amon also faced that in an interview, when asked about data moving to the cloud, he said: "Where is that data coming from? Who is actually connecting all of those different devices to the cloud? That's us! So, if you believe in that opportunity, you should believe in a Qualcomm opportunity". Larger addressable market. As Qualcomm broadens to more sectors, their addressable market is growing. The management believes that their $100 billion addressable market of today, will grow to a $700 billion addressable market in the next decade. Meaning their addressable market should 7x!
All right, we have gone through the numbers, potential and risks regarding Qualcomm, and now it is time for us to calculate a price for Qualcomm. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 7 (which is below the current at 8). I chose an Estimated future EPS growth rate of 15 (which is the highest I use), Estimated future PE 30 (which is double the growth rate, as the historically highest P/E is higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $210, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Qualcomm at price of $105 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 10.536. The Capital Expenditures was 1.888. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 1.321,6 in our further calculations. The Tax Provision was 1.231. We have 1.120 outstanding shares. Hence, the calculation will be like this: (10.536 - 1.321,6 + 1.231) /1.120 x 10 = 93,26 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". Qualcomm delivered a free cash flow per share of $9,43 in their latest financial year. With the Free Cash Flow Per Share at 9,43 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $148,46.
I believe that Qualcomm is a great company, and I'm quite comfortable in the management despite only being in charge for a limited amount of time. Qualcomm has a moat and a wide variety of of impressing partners. All their QTC businesses are growing nicely and are expected to continue to do so (handsets by 12 % CAGR, RF Front-End by 12 % CAGR, Automotive by 36 % CAGR, and IoT by 17 % CAGR). Meaning there are lots of potential for Qualcomm moving forward. There are different risks to consider when investing in Qualcomm, some short-term and others longer-term. Qualcomm is very exposed to China, and the fact that China wants to reach 70 % semiconductor self-sufficiency in 2025 should be something to watch out for. Furthermore, escalating political tensions between the United States and China could also affect Qualcomm. Nevertheless, I still think the overall investment case in Qualcomm is solid, as I expect them to continue to grow moving forward. I would like the price to get a little closer to the margin of safety price but as long as you can get it below the PAYBACK TIME price of $148,46, I believe it is a solid investment.
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