Qualcomm: The world's largest startup company.

The headline is a quote from the CEO in a previous annual meeting, and not one I came up with myself. The CEO could very well be correct, as Qualcomm is expanding in various sectors. Qualcomm has a strong historical performance and has been on my radar for quite some time. The question is whether now is the right time to purchase Qualcomm shares.

This is not a financial advice. I am not a financial advisor and I only do these posts 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 any shares in Qualcomm. If you would like to know what is in my portfolio or if you want to copy it, you can find instructions on how to do so here. I don't currently own stocks in any semiconductors. However, I do think that semiconductors will shape the future, and it is a sector I am currently investigating. As always, I will strive to maintain an unbiased analysis. If you want to purchaseshares or fractional shares of Qualcomm, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.

Qualcomm was established in 1985 and is an American company that designs semiconductors, software, and services for wireless technology. They also own patents. Their business can be divided into two 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. These components are utilized in mobile devices, wireless networks, Internet of Things (IoT) devices, broadband gateway equipment, consumer electronic devices, and automotive systems for telematics and infotainment. Approximately 84% of their revenue comes from QTC. The QTC segment achieves an EBT margin of 26%. Their other segment is Qualcomm Technology Licensing (QTL). QTL grants licenses or provides rights to use portions of their intellectual property portfolio, which includes certain patent rights that are essential to and/or useful in the manufacture, sale, and/or use of specific wireless products. QTL delivers approximately 16% of the revenue. The QTL segment achieves an EBT margin of 66%. Qualcomm is known for its Snapdragon brand, and the value of the Snapdragon brand alone would position it within Interbrand's top 100 brands. Qualcomm collaborates with some of the world's largest companies, such as Microsoft, Apple, BMW, Samsung, and Walmart, among others, across various sectors. This is sufficient for me to conclude that Qualcomm has a strong brand moat.

Their CEO is Cristiano Amon. He joined Qualcomm in 1995 as an engineer and was appointed CEO in late June 2021. Prior to joining Qualcomm, he held positions at Vésper, NEC, Ericsson, and Velocom. He holds a Bachelor of Science degree in electrical engineering and an honorary doctorate from Universidade Estadual de Campinas, São Paulo. He was elected as CEO due to his proven track record of successful execution, extensive knowledge of the company, strong relationships with Qualcomm's partners, and the vision to drive Qualcomm forward. Some examples of this include his credit for Qualcomm's expansion beyond mobile phones. He has been described as gregarious, passionate, and optimistic about everything. He is known for quoting racing driver Mario Andretti, who said, "If everything seems under control, you are just not going fast enough." Since Cristiano Amon has been the CEO for a short period of time, it is difficult to make any judgment about his performance in the role. However, he undoubtedly possesses the credentials and experience to propel Qualcomm forward. I read an article that referred to Cristiano Amon as Qualcomm's Satya Nadella, the CEO of Microsoft. This comparison is drawn because Cristiano Amon had extensive experience in various positions within the company before taking on the role of CEO. Nevertheless, I would feel confident investing in Qualcomm with Cristiano Amon as CEO.

I believe that Qualcomm has a strong brand moat. I'm also confident in the management. Now, let's analyze the numbers to determine if Qualcomm indeed meets our requirements for a strong competitive advantage. If you need an explanation of the numbers, you can refer to "MY STRATEGY" on the website.

The first metric we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history, with all figures exceeding 10% for each year. Overall, Qualcomm has consistently delivered a strong return on invested capital (ROIC) in most years. However, in fiscal 2017, their performance was below expectations, while the ROIC in 2018 was disastrous. The poor performance in 2018 can be attributed to the hostile takeover attempt by Broadcom and the subsequent decision to abandon the acquisition of NXP Semiconductors. Nonetheless, they have consistently increased their return on invested capital (ROIC) year over year since 2018. They have achieved a ROIC above 20% in all five years, which is very encouraging.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most crucial of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Fiscal year 2018 stands out as a disastrous year. However, Qualcomm has been able to steadily increase its equity at a high rate since 2018, which is promising.

Finally, we will examine the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offers a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Qualcomm has had a positive free cash flow every year. The levered free cash flow margin has fluctuated over the years, but Qualcomm managed to achieve its second-highest level in the past decade in fiscal year 2023, which is very encouraging. The free cash flow yield is also above the ten-year average, which may suggest that the stock is trading at an attractive price. However, we will revisit this later in the analysis.

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has a manageable debt that can be repaid within a period of three years. This is achieved by dividing the total long-term debt by earnings. After conducting the calculations on Qualcomm, it appears that the debt can be paid off in 2 years. It is acceptable, and debt is not a concern for me when considering whether to invest in Qualcomm.

As with all other companies, there are certain risks that you need to consider before investing in Qualcomm. Economic downturns. Qualcomm operates in the consumer business, and economic downturns worldwide can impact consumer confidence, leading to reduced purchases of products that use Qualcomm technology. This will affect Qualcomm as it did in fiscal year 2023, when revenues were negatively impacted by the weakness in the macroeconomic environment. As a result, QCT revenues decreased by 19% in fiscal 2023 compared to the prior year, primarily due to lower handset and IoT revenues, while QTL revenues decreased by 17% in fiscal 2023 compared to the prior year. A small number of customers contribute a significant portion of their revenue. In its annual report, Qualcomm mentions that it derives a significant portion of its revenues from a small number of customers and licensees, particularly from the sale of premium tier handset devices, and expects this trend to continue in the foreseeable future. One of these customers is Apple, which represents 22% of Qualcomm's revenue. While Qualcomm and Apple have recently extended their collaboration until 2026, it is no secret that Apple is trying to develop its own 5G modem. If Apple succeeds and if other large customers develop their own products, it will hurt Qualcomm. The China risk. Qualcomm generates approximately 62% of its revenue in China. Lately, we have seen the U.S. impose export restrictions on semiconductors to China. While these restrictions haven't impacted Qualcomm, there is a possibility that new restrictions may affect the company in the future. Restrictions may also result in China developing their own integrated circuit products, as China aims to achieve 70% self-sufficiency in semiconductors by 2025.

There are not only risks, but also a lot of potential for Qualcomm in the future. One is artificial intelligence. Qualcomm's management has stated that they are witnessing an unprecedented pace of innovation in generative AI and expects that high-performance on-device AI will become a requirement over the next few years, driving unit growth. As Qualcomm has established itself as a leader in on-device Gen AI for smartphones, next-generation laptops, XR, and automotive, the company is well-positioned to benefit from this opportunity. The Metaverse. Qualcomm sees significant potential in the Metaverse and is already collaborating with Microsoft and Meta regarding its development. Qualcomm CEO Cristiano Amon is more optimistic about the Metaverse than most others. He has stated, "The Metaverse could be as big as the smartphone itself", and later emphasized that the convergence of physical and digital spaces presents a significant future opportunity for Qualcomm. Qualcomm recently launched the Snapdragon AR1 platform, its first dedicated platform for smart glasses. Snapdragon continues to be the preferred platform for leading VR, MR, and AR designs. The automotive segment is growing. During fiscal year 2023, Qualcomm encountered challenges as revenue decreased by 22% in handsets and 19% in IoT. However, the automotive segment performed well with a 24% increase in revenue. Qualcomm anticipates growth due to the digital transformation in the automotive industry, which introduces new levels of computing, intelligence, and cloud connectivity to vehicles. Qualcomm believes that this digital transformation offers the potential for new revenue opportunities as vehicles gain the ability to evolve with over-the-air updates and digital services. They believe that the Snapdragon Digital Chassis remains at the center of this digital transformation. Qualcomm anticipates that Automotive revenues will exceed $4 billion in 2026, compared to $1,9 billion in fiscal year 2023.

Now it is time to calculate the share price of Qualcomm. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,52, which is from the fiscal year 2023. I have selected a projected future EPS growth rate of 15% (Finbox expects EPS to grow by 15,7%). Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on the historical higher P/E ratio of Qualcomm. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $130,84. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Qualcomm at a price of $65,42 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The expected annual return should be at least 10%. I calculated it as follows: The operating cash flow last year was 8.655 and capital expenditures were 1.791. I tried to review their annual report to calculate the proportion of capital expenditures designated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.254 in our calculations. The tax provision was 104. We have 1.114 outstanding shares. Hence, the calculation will be as follows: (8.655 – 1.254 + 104) / 1.114 x 10 = $67,37 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Qualcomm's Free Cash Flow Per Share at $8,83 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is $124,43.

I believe that Qualcomm is a great company, and I am quite comfortable with the management, despite their limited time in charge. Qualcomm has a competitive advantage and a wide variety of impressive partners. The company has plenty of growth opportunities ahead of them, and its management has set ambitious long-term targets. I'm not overly concerned about the macroeconomic factors because they will eventually reverse. I am more concerned about Apple's ability to deliver their own product. So far, they have not managed to do so, which is why they recently extended their collaboration with Qualcomm, but they may succeed in the future. The China risk is something that needs to be monitored, as new restrictions could potentially significantly harm Qualcomm, given that the majority of their revenue comes from China. I don't think we can fully grasp the potential of AI and the Metaverse yet, but Cristiano Amon seems to be very optimistic about both. Both could be significant growth drivers for Qualcomm. The same is true for their automotive segment, which continues to grow by double digits. I had to limit the analysis, but there are other growth factors that I didn't mention, such as Qualcomm entering the PC market. I believe the potential significantly outweighs the risks, and I will add Qualcomm to the portfolio if I can purchase it below the Payback Time price of $124,43.

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