Qualcomm (QCOM) is one of the leading companies in the communication equipment industry. The company operates through four business segments and has one of the finest business models I have ever come across. In this article I will discuss the company's historical performance, trends in the industry and I will scrutinize its preparation in the context of upcoming trends. Moreover I will value the stock to decide whether it is a good investment.
Glance into the Company's history
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Qualcomm reported tremendous results in fiscal year 2013. It reported revenues of $24.87 billion reflecting an increase of 30% year over year clearly outperforming the industry average growth rate of 6.6%. Growth was primarily driven by higher equipment sales volume and price, increased service contracts, higher revenue per contract and higher total licensing revenues.
The company's operating expenses were $17.636 billion during fiscal year 2013 reflecting an increase of 31.2% year over year. This increase was primarily driven by the increased cost of equipment and services. If we see these expenses on a common size basis almost every cost decreased as a percentage of revenue except the aforementioned cost of equipment and services head.
Moreover, the company's reported income from continued operations of $6.853 billion reflected an increase of 29.57%year over year. The increased net income was the product of increased topline growth, control on operating expenses, and increased investment income.
DuPont Analysis
To better analyze the financial performance of the company I have used the DuPont analysis. In my analysis I have used the average return on equity calculated by average financial leverage, asset turnover and trailing and net profit margin calculated using trailing twelve month figures.
This is all shown in the chart presented above. Qualcomm's return on equity is driven by higher net income which is a sustainable source of generating return on equity. Therefore the company is in a better position to distribute returns to shareholders.
Industry prospects
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According to the report issued by IDC smartphone and tablet shipments are expected to increase at a CAGR of approximately 22% whereas Qualcomm's management expects a CAGR of 20%. This anticipated double digit growth of smartphones will be a significant source of revenues for smart phone manufacturers as well as the hardware and technology providers of these manufacturers.
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Moreover double digit growth is also expected in HSPA and HSPA+ technologies, as well as in LTE connections so the tech giants who are involved in developing, licensing and manufacturing the equipment required for running these technologies will stay high on growth in the coming periods as well.
Technological Advancements Expected to Fuel Growth
During the most recent analyst meeting, Qualcomm's management has highlighted some new technological developments expected to provide the company with a competitive advantage. The company has developed hardware for smartphones and tablets which will be capable of playing Ultra HD videos and has developed the latest video compression software "H.265" that will cut the required data rate by half without impinging video quality. Moreover, the company is developing a 5.1 and 7.1 surround sound system and this audio technology is expected to enhance users' audio experience.
The company is aggressively working on refining its location systems by improving their resolution and granularity. This technology is primarily high in demand among commercial circles all over the globe.
In addition to this, the company is modernizing their radio technology, radio frequency and computational photography capabilities. More specifically, the company has improved antenna tuning, envelope tracking and other such technologies.
Besides those mentioned above, the company introduced its Qualcomm Snapdragon 410 chipset with integrated 4G LTE World Mode. The new chip is mainly designed for the rapidly growing 4G LTE market. Cost-effectiveness of the new chip will make sure that it catches the attention of manufacturers serving price-conscious markets. I think this device will be a blockbuster in the developing world where the number of price conscious consumers is prevalent.
Moreover, Qualcomm has a clear advantage over its competitors as it's a major supplier of hardware to two leading smart phone manufacturers: Apple (AAPL) and Samsung (OTC:SSNLF). The company also continues to see the adoption of 3G/4G technology in smartphones and this allows the company to beat competitive pressures and average selling prices. This adaptation will be a source of revenue for the company allowing it to receive royalties and licensing fees for the use of its patented technology.
Valuation
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The table above shows the fair value of Qualcomm derived through the multiple based valuation approach. The value of QUALCOMM's earnings, book value, sales and cash flows per share have been calculated using trailing twelve month figures. Moreover, the weight to P/E, P/B, P/S, and P/Cash Flow has been assigned on the basis of survey estimates.
On the basis of given multiples of industry and the company the fair value of the stock should be $79.44 reflecting an upside potential of 8.96%.
To reconfirm the fair value of the stock with the market expectation I have used the forward price to earnings ratio and two estimates of earnings per share. To reach the estimated share price I have equally weighted both price estimates. According to the estimated share price the current price of the stock is 2% overvalued.
By equally weighting the predicted prices both calculated through trailing twelve months, the multiple based valuation as well as the stock price calculated on the basis of forward P/E gives an estimated stock price of $75.5 which reflects an upside potential of 3.31% from the current price.
Conclusion
Qualcomm has a superb business model and the company has performed extremely well during the past. Moreover, the company is in an industry with excellent prospects and through innovation it is well prepared and ready to capitalize on these anticipated opportunities.
Hence, on the basis of this analysis I will rate Qualcomm as a long-term buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.
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