Qualcomm: The world's largest startup company.
Opdateret: 29. apr.
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 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 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 85,5 % 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 14,5 % 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 numbers to see if Qualcomm does live up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate 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 years. Overall, Qualcomm has delivered a great ROIC in all years. However, in fiscal 2017 they underperformed while the ROIC in 2018 was disastrous. The reason of the bad numbers in 2018 was because they were amidst a hostile takeover from Broadcom, while also having to abandon the acquisition of NXP Semiconductors. Nonetheless, they have grown their ROIC nicely year over year ever since 2018, which is very nice to see.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Fiscal 2018 stands out as it was a disastrous year. However, Qualcomm has been able to grow their equity nicely at a high rate ever since, which is promising to see.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. It is not surprising that Qualcomm has a positive free cash flow in all years. The levered free cash flow margin has had some swings and while 15,5 % is bad, it is worth noticing that it is the second lowest in the last 10 years. The same goes for the free cash flow yield, which has only been lower once in the last 10 years.
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 earnings. Doing the calculations on Qualcomm, it shows a debt that can be paid off in 1,05 years. It is very acceptable, and debt isn't a concern of mine if I should invest 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. Management has mentioned that they have started to see a deceleration in demand in handsets and consumer IoT. If less Qualcomm products are sold, it would hurt both their balance sheet. High inventory. In the earnings call of Q4 in fiscal 2022, management mentioned that the rapid deterioration in demand and the easing of supply chain constrains across the semiconductor industry has resulted in elevated channel inventory, and that it will take a couple of quarters to work itself down, meaning it will hurt the balance sheet of Qualcomm in the short-term. 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 8 (which is in line with the one from fiscal 2021). 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 $240, 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 $120 (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 9.096. The Capital Expenditures was 2.262. 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 1.583,4 in our further calculations. The Tax Provision was 2.012. We have 1.122 outstanding shares. Hence, the calculation will be like this: (9.096 - 1.583,4 + 2.012) /1.122 x 10 = $84,89 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 6,09 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $96,14.
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 impressing partners. Their business is growing nicely, and management has set some nice long-term targets, while their addressable market will grow to be much larger in the future. 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 even though the latest restrictions on U.S. companies selling microchips to China doesn't 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 will open a position if I can get it below the PAYBACK TIME price of $96,14 as I will get it on a 50 % discount on two out of three calculations.
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