It’s been a wild few months for shares of Qualcomm (NASDAQ:QCOM), as the global chip giant has found itself in the middle of a lot of noise – ranging from corporate deals, to legislation, to geopolitical tensions – the sum of which has slung Qualcomm stock from $50, to $90, back to $65, and up to $75.
Some of that noise has been very positive for QCOM stock. Qualcomm recently signed a huge deal with Apple (NASDAQ:AAPL) wherein Apple licensing revenue will come back into the Qualcomm ecosystem for the next several years. Some of it has been negative. The FTC recently ruled that Qualcomm’s licensing agreements violated antitrust law, and need to be renegotiated.
But, if you zoom out, the fundamentals underlying Qualcomm stock are favorable. In the big picture:
Global semiconductor market fundamentals are starting to improve. Qualcomm’s standing in that market is likewise improving thanks to the landmark Apple deal. Recent developments with respect to Qualcomm’s licensing business imply that Qualcomm won’t see any hit on its licensing business anytime soon. Qualcomm stock is still pretty cheap relative to its now very big near term growth prospects.
Net net, then, Qualcomm stock – which is already up more than 30% year-to-date – should stay in rally mode for the foreseeable future.
Global Semiconductor Market Fundamentals Are Improving
The global semiconductor market has been in free fall in 2019 as rising geopolitical tensions and economic uncertainty have weighed on global demand, against the backdrop of sky-high inventory levels, resulting in depressed sales and margin figures for semiconductor players like Qualcomm.
But, the market is finally starting to show signs of life. While still down big year-over-year, global semiconductor sales improved month-over-month in May for the first time in several months, including a month-over-month gain in the all-important Americas and China markets.
Further, Texas Instruments (NASDAQ:TXN) recently reported Q2 revenue and profit beats as operations improved sequentially. Teradyne (NASDAQ:TER) also reported Q2 revenue and profit beats amid strong 5G and networking demand. Mellanox (NASDAQ:MLNX) topped Q2 revenue estimates as the company reported sustained strong cloud and AI demand. Intel (NASDAQ:INTC) reported strong Q2 numbers, too.
Net net, global semiconductor market fundamentals are stabilizing and improving, and this dynamic provides an increasingly favorable backdrop for QCOM stock.
Qualcomm’s Competitive Positioning Is Improving
Importantly, Qualcomm’s competitive positioning in the soon-to-be resurgent global semiconductor market is improving.
This comes back to the fact that Apple is once again a Qualcomm customer. For several years, Apple was one of Qualcomm’s biggest and most important customers. Then, the two started arguing over licensing agreements and royalty fees. Apple stopped paying the disputed licensing fees.
In April, though, the two companies came to a deal. They dropped all litigation, Apple paid Qualcomm a huge lump sum fee for missed payments, and the two agreed to a multi-year partnership wherein Apple has essentially been locked in as a Qualcomm customer into 2025.
That’s big news for two reasons. First, it means one of Qualcomm’s biggest and most important customers is back, and locked in for the next several years. Two, it means Qualcomm should get a huge boost when Apple launches its 5G phone next year.
Broadly, thanks to the Apple deal, Qualcomm’s profit growth outlook over the next several years is quite favorable.
Qualcomm’s Licensing Business Won’t Get Hit Anytime Soon
One of the biggest risks to the QCOM growth narrative has been the concern that Qualcomm’s licensing business will take a big hit over the next few years as the government forces Qualcomm to renegotiate such deals on less favorable terms.
This concern was birthed out of an FTC ruling which found that Qualcomm’s licensing practices violated antitrust law. But, since then, the U.S. Justice Department has requested that the enforcement of this antitrust ruling be put on pause.
Citing support from the Energy Department and Defense Department, the DoJ basically stated that the ruling was incorrect and that disrupting a company as important to the nation’s energy and defense services as Qualcomm would have broadly adverse implications.
The DoJ’s request for a pause here certainly isn’t the last chapter in this book. But, it does imply that over the next few chapters, no hammer will be brought down upon Qualcomm, meaning that the company’s mobile licensing business should remain healthy for the foreseeable future.
Qualcomm Stock Has Valuation Upside
Given the company’s robust profit growth potential over the next few years, QCOM stock seems slightly undervalued at current prices.
Qualcomm’s depressed revenue and profit trends will improve in the back-half of 2019 thanks to renewed Apple revenue. In 2020 and 2021, Qualcomm’s revenue and profits will get another big boost thanks to the widespread roll-out of 5G coverage and 5G smartphones. Thus, between now and 2021, Qualcomm’s revenue and profits stand to rise by a lot.
According to YCharts, the consensus revenue estimate for fiscal 2021 is $28.4 billion, up 25% from last year’s $22.7 billion revenue base. The consensus EPS estimate for fiscal 2021 is $6.80, up 85% from last year’s $3.60 EPS base.
Thus, when contextualized with the fact that EPS is expected to nearly double over the next few years, QCOM stock’s elevated forward earnings multiple of 20 makes sense.
If you apply this stock’s historically average 13-times forward multiple to the fiscal 2021 projected EPS base of $6.80, you arrive at a fiscal 2020 price target of over $88. Discounted back by 7% (three points below 10% to account for the 3% yield), which equates to a fiscal 2019 price target of just under $83.
Bottom Line on Qualcomm Stock
There has been a lot of noise surrounding QCOM stock over the past several months. But, zooming out, the core fundamentals underlying this stock are favorable, and project to remain favorable for the foreseeable future. All things considered, then, Qualcomm stock has fundamentally supported runway to prices above $80 over the next few months.
As of this writing, Luke Lango was long QCOM and INTC.
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