Qualcomm: The world's largest startup company.

The headline is a quote from the CEO at a previous annual meeting, and not one I came up with myself. The CEO may very well be correct, as Qualcomm is expanding into 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.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Qualcomm. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Qualcomm either. Thus, I have no personal stake in Qualcomm. If you want to purchase shares (or fractional shares) of Qualcomm, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

Qualcomm, founded in 1985, is a leading American technology company instrumental in advancing wireless communication. The company operates in two primary business segments: Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL). QCT, which designs and sells chips, accounts for about 86% of Qualcomm’s revenue. This division powers a wide array of products, including smartphones, connected cars, and smart home devices. Approximately 75% of QCT’s income comes from mobile phone chips, while 16% comes from the Internet of Things (IoT), encompassing smart home gadgets, factory equipment, and other connected devices. Automotive systems, such as in-car entertainment and driver assistance technologies, contribute 9% of QCT’s revenue. The division is highly profitable, with 29% of its revenue translating into earnings before taxes. QTL focuses on licensing Qualcomm’s extensive portfolio of patents, which are critical for wireless technologies like 3G, 4G, and 5G. Though this segment contributes only 14% of the company’s revenue, it is significantly more profitable, with 72% of its revenue turning into earnings before taxes. Companies producing phones, tablets, and other wireless devices pay Qualcomm for the right to use its patented innovations. Qualcomm stands out due to its leadership in wireless technology and its strong brand. Snapdragon chips are widely used in premium smartphones and vehicles, and the company has established long-term partnerships with global industry leaders. Qualcomm’s technologies are foundational to mobile communication and drive advancements in areas like artificial intelligence and smart devices. This blend of cutting-edge innovation and essential technology creates a strong moat, positioning Qualcomm for sustained growth in an increasingly connected world.

Management

Cristiano Amon is the CEO of Qualcomm, having joined the company in 1995 and assumed the CEO role in 2021. Prior to becoming CEO, Amon held various leadership positions at Qualcomm and gained valuable industry experience at Vésper, NEC, Ericsson, and Velocom. He holds a Bachelor of Science in Electrical Engineering and an honorary doctorate from Universidade Estadual de Campinas in São Paulo, Brazil. Cristiano Amon was chosen as CEO for his proven track record of success within Qualcomm, his deep understanding of the industry, and his strong relationships with the company’s partners. He has played a pivotal role in diversifying Qualcomm’s business beyond mobile phones, spearheading the company’s expansion into automotive systems, Internet of Things (IoT) devices, and personal computing. Under his leadership, Qualcomm has also solidified its position as a leader in the 5G market. Known for his passionate and optimistic leadership style, Cristiano Amon often quotes racing driver Mario Andretti’s saying, “If everything seems under control, you’re just not going fast enough,” reflecting his dynamic and forward-thinking approach. His leadership has drawn comparisons to Satya Nadella of Microsoft, as both leaders brought years of internal expertise before taking the helm and executing transformative strategies. I believe Cristiano Amon is well-suited to lead Qualcomm into the future, thanks to his extensive experience, visionary leadership, and commitment to driving innovation across the company’s diverse business segments.

The Numbers

The first metric we will evaluate is the return on invested capital (ROIC). We typically look for a 10-year history with all figures consistently exceeding 10% annually. Qualcomm has generally delivered strong ROIC across most years, but there were notable exceptions. In fiscal 2017, performance fell below expectations, and in fiscal 2018, ROIC was significantly impacted by the hostile takeover attempt by Broadcom and the decision to abandon the acquisition of NXP Semiconductors. Since 2018, Qualcomm has steadily improved its ROIC year over year, achieving consistent figures above 20% for the past six years. The company reached its highest ROIC in fiscal years 2021 and 2022, driven by pandemic-related stimulus that fueled a surge in demand for new phones. However, demand decreased in fiscal years 2023 and 2024 due to macroeconomic factors, which affected ROIC. Despite these challenges, it is encouraging to see that Qualcomm’s ROIC improved from fiscal year 2023 to 2024, indicating resilience and effective management even in a less favorable market environment. This trend supports the view that Qualcomm remains a quality company with strong long-term fundamentals.

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 was particularly challenging for Qualcomm, with equity decreasing by over 87%. This decline was primarily due to the hostile takeover attempt by Broadcom and the subsequent decision to abandon the acquisition of NXP Semiconductors. However, since 2018, Qualcomm has steadily increased its equity at an impressive rate of over 10% annually. This consistent growth is very encouraging, even though equity has yet to return to pre-2018 levels.

Finally, we will analyze 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 provide 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. Qualcomm has consistently delivered positive free cash flow every year over the past decade, which is not surprising given the company's robust business model. In fiscal year 2024, Qualcomm achieved its highest free cash flow ever, following a record-breaking performance in 2023. This is highly encouraging, and management has expressed confidence that the company will continue generating strong free cash flow in the future. The levered free cash flow margin also improved in fiscal year 2024, reaching its second-highest level ever. This indicates not only growth in free cash flow but also an increase in efficiency, which is particularly encouraging. Additionally, the free cash flow yield is at its third-highest level in the past decade, suggesting that the shares are currently trading at an attractive valuation. However, this is an aspect we will examine more closely later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to assess whether a business has manageable debt that can be repaid within a period of three years, calculated by dividing the total long-term debt by earnings. Based on calculations for Qualcomm, the company can repay its debt in 1,31 years, which is well below the three-year threshold. This indicates that debt is not a concern if one were to invest in Qualcomm. It is worth noting that Qualcomm has not had a debt-to-earnings ratio above three years since 2019, further suggesting that debt management is unlikely to be an issue moving forward. Additionally, management has emphasized their commitment to maintaining a cautious approach to leverage, viewing a strong balance sheet as a strategic asset.

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Risks

Relying heavily on a few key customers poses significant risks for Qualcomm, especially as some of these customers are developing competing products. A substantial portion of Qualcomm’s revenue depends on a small number of clients, many of whom purchase its premium-tier chipsets for smartphones. If these customers reduce their reliance on Qualcomm’s products, the company’s financial performance could be significantly impacted. This risk is further amplified by efforts from major clients, such as Apple, to vertically integrate their supply chains. Apple, for instance, is actively working on developing its own modem chips. Should Apple successfully produce these modems, it may no longer need to source them from Qualcomm, potentially leading to a substantial loss of revenue from one of its most critical customers. The potential loss of premium-tier modem sales is particularly concerning because these products contribute significantly to Qualcomm’s revenue and margins. Qualcomm also invests considerable resources in customizing its products to meet the unique needs of key customers. If these tailored solutions fail to secure the expected purchase commitments, the company risks absorbing unrecoverable costs. Furthermore, Qualcomm’s financial results are closely tied to the timing of major product launches by its key customers, introducing additional variability and potential revenue fluctuations. The reliance on a concentrated customer base also gives these clients considerable purchasing power. This dynamic could pressure Qualcomm to offer lower prices or more favorable terms to retain their business.

The China risk is a critical factor to consider when evaluating an investment in Qualcomm, given the company's heavy reliance on the Chinese market and the ongoing geopolitical tensions between the United States and China. With approximately 46% of Qualcomm's revenue coming from China, the region represents a vital yet vulnerable market for the company. A significant portion of Qualcomm’s revenue is generated from Chinese original equipment manufacturers (OEMs) and non-Chinese OEMs that sell their products in China, the world’s largest smartphone market. However, this reliance creates substantial risks. If these customers reduce their purchases or develop their own integrated circuit products - supported by initiatives like China’s "Made in China 2025" campaign - Qualcomm could face a significant revenue decline. The Chinese government’s push for semiconductor self-sufficiency further intensifies this risk, as local companies are incentivized to reduce dependence on foreign suppliers like Qualcomm. Geopolitical tensions between the U.S. and China exacerbate these challenges. Trade policies, export restrictions, and sanctions have disrupted Qualcomm’s ability to operate in China. For instance, the U.S. Department of Commerce’s decision to revoke Qualcomm’s license to sell certain chips to Huawei resulted in an immediate and substantial revenue loss. Future restrictions or retaliatory measures from China could further impact Qualcomm’s business operations, creating a highly unpredictable environment. Market dynamics in China also present risks to Qualcomm's revenue. For example, if Chinese companies like Huawei regain market share using their own or alternative technologies, demand for Qualcomm’s products could decrease. Additionally, a consumer shift toward refurbished or lower-cost devices could weaken demand for Qualcomm's premium-tier offerings, which are key contributors to its profitability. Given that nearly half of Qualcomm's revenue is tied to the Chinese market, the risks associated with this concentration are significant.

Macroeconomic factors pose a significant risk to Qualcomm due to its exposure to the highly cyclical semiconductor industry and its reliance on consumer-driven markets. Demand for semiconductors is inherently volatile, with the industry frequently experiencing downturns driven by shifts in global economic conditions, fluctuations in product demand, and rapid technological advancements. These downturns often result in reduced demand for end-user products, elevated inventory levels, and price erosion, all of which can negatively impact Qualcomm’s revenues and profitability. Economic slowdowns further exacerbate these challenges by eroding consumer confidence and reducing discretionary spending. Since Qualcomm’s technology powers a wide range of consumer products, including smartphones and connected devices, a decline in consumer demand directly translates into lower sales of Qualcomm’s products and those of its customers, affecting the company’s financial performance. Macroeconomic pressures such as inflation add another layer of risk. Rising operational costs, including higher wages and expenses associated with supply chain disruptions, can erode margins. Additionally, inflation-driven price increases for consumer devices may deter purchases, suppressing end-user demand and compounding the financial challenges for Qualcomm.

Reasons to invest

Handsets remain a compelling reason to invest in Qualcomm, even as the company diversifies into sectors like automotive and IoT. Qualcomm continues to dominate the premium-tier smartphone market, a segment that generates substantial revenue and margins. This leadership is underpinned by its flagship Snapdragon processors, including the recently launched Snapdragon 8 Elite. The Snapdragon 8 Elite represents a major technological leap, featuring the second-generation Oryon CPU, a 45% improvement in AI performance, and significant energy efficiency gains. These advancements reestablish Qualcomm's performance leadership within the Android ecosystem and solidify its role as a key player in mobile computing. Although the overall handset market is not experiencing rapid growth, demand for premium-tier devices is rising. Devices priced above $400 now account for 30% of the market, up from 21% a few years ago. Qualcomm’s strategic focus on this high-end segment positions it well to benefit from this trend, as premium-tier products command higher average selling prices and drive greater revenue. Despite challenges such as the loss of Huawei as a customer, Qualcomm has shown resilience and continued strength. Its dominance in the Android premium tier is a critical competitive advantage, with the company generating over five times the premium-tier revenue of its nearest competitor. This success reflects the Snapdragon platform’s superior performance in key areas such as CPU speed, 5G connectivity, and AI capabilities. Additionally, the ongoing AI-driven smartphone upgrade cycle serves as an important growth catalyst. As consumers increasingly opt for advanced devices with enhanced AI features, Qualcomm’s premium-tier products are well-positioned to capture this demand, further bolstering its growth in the handset market.

IoT presents an increasingly compelling reason to invest in Qualcomm as the company harnesses its expertise to innovate across consumer markets. Qualcomm’s Snapdragon platforms are driving transformative changes in IoT applications by combining cutting-edge performance, energy efficiency, and AI capabilities, reinforcing the company’s leadership in the rapidly expanding IoT ecosystem.  One area of significant growth is Qualcomm’s expansion into personal computing through its Snapdragon X Series platforms, including the newly launched Snapdragon X Plus 8-core compute platform. These platforms are reshaping the PC market by offering high performance, extended battery life, and advanced AI capabilities. This enables leading OEMs like Dell, HP, Lenovo, Samsung, Acer, and ASUS to create thin, light, and affordable AI-enabled PCs, significantly expanding Qualcomm's addressable market. Another promising area is augmented and virtual reality (AR/VR). Qualcomm’s Snapdragon AR1 Gen 1 powers cutting-edge products like the Ray-Ban Meta smart glasses, which feature AI-driven capabilities such as real-time translation, navigation, and hands-free digital assistance. These innovations seamlessly integrate physical and digital experiences, positioning Qualcomm as a leader in the evolving AR/VR market. Qualcomm’s IoT revenues highlight its strong performance, with consistent sequential growth throughout 2024, even as competitors face headwinds in the broader IoT market. This resilience underscores Qualcomm’s innovative approach and its ability to effectively address a wide range of IoT use cases. IoT represents a transformative growth opportunity for Qualcomm. The company’s advanced Snapdragon platforms, leadership in AR/VR, and strong ecosystem partnerships provide a solid foundation for sustained growth and diversification in this dynamic sector.

Automotive represents a compelling reason to invest in Qualcomm, as the company is at the forefront of the digital transformation sweeping the automotive industry. Modern vehicles are evolving into software-defined platforms, integrating advanced computing, AI, and cloud connectivity. Qualcomm’s Snapdragon Digital Chassis has become a cornerstone for automakers. Central to Qualcomm’s automotive strategy are the Snapdragon Ride Elite and Snapdragon Cockpit Elite platforms. These systems enhance vehicle safety, enable automated driving, and deliver interactive in-car experiences such as gaming and AI-driven controls. Their flexibility allows automakers to consolidate multiple features into a single platform, streamlining development and reducing costs. Qualcomm’s success in the automotive sector is underscored by its partnerships with major automakers like Li Auto and Mercedes-Benz. The increasing adoption of driver assistance systems and autonomous driving technology is further driving demand for Qualcomm’s solutions. Industry forecasts suggest that by 2030, 67% of new vehicles will feature embedded cellular connectivity, with 48% supporting 5G, presenting a significant growth opportunity for Qualcomm. Automotive revenues are expected to grow by 50% year-over-year, reflecting Qualcomm’s strong leadership and momentum in this rapidly expanding market. The company’s ability to innovate and collaborate with leading automakers positions it as a key player in the future of the automotive industry.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

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 8,94, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 13% (Finbox expects EPS to grow by 13%). Additionally, I have selected a projected future P/E ratio of 26, 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 $195,04. 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 $97,52 (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 13.645 and capital expenditures were 1.078. 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 755 in our calculations. The tax provision was 226. We have 1.113 outstanding shares. Hence, the calculation will be as follows: (13.645 – 755 + 226) / 1.113 x 10 = $117,84 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 $10,02 and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $144,45.

Conclusion

I believe Qualcomm is a great company with excellent management. The company has a strong moat and an impressive array of partners. Qualcomm has consistently achieved a high ROIC since 2018 and recently delivered its highest free cash flow and second-highest levered free cash flow margin ever. However, there are risks to consider. Relying heavily on a few key customers poses a significant challenge for Qualcomm, as it exposes the company to revenue loss if major clients, such as Apple, develop their own competing products and reduce reliance on Qualcomm’s technologies. Additionally, the China risk is notable because nearly half of Qualcomm’s revenue comes from the Chinese market, making it highly vulnerable to geopolitical tensions, trade restrictions, and China's push for semiconductor self-sufficiency. Macroeconomic factors also remain a concern, as the cyclical nature of the semiconductor industry and reliance on consumer-driven markets make Qualcomm susceptible to economic downturns, which can reduce demand and negatively impact revenues. Despite these risks, Qualcomm has strong growth drivers. Handsets remain a compelling reason to invest, given Qualcomm's leadership in the premium-tier smartphone market, driven by its advanced Snapdragon processors like the Snapdragon 8 Elite. With increasing demand for high-end devices and the ability to command higher average selling prices, Qualcomm continues to outperform competitors. IoT is another strong reason to invest. Qualcomm leverages its Snapdragon platforms to drive innovation in personal computing and augmented reality, delivering high performance, energy efficiency, and advanced AI capabilities. With consistent IoT revenue growth and leadership in emerging markets such as AI-enabled PCs and AR devices, Qualcomm is well-positioned for long-term growth and diversification. Automotive is a key growth area, driven by the Snapdragon Digital Chassis, partnerships with major automakers, and a projected 50% year-over-year revenue growth in this fast-expanding market. While Qualcomm faces uncertainties, there are many compelling reasons to invest. I plan to open a position at the Ten Cap price of $117, as it offers a 50% discount to intrinsic value on two out of three calculations.

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