Qualcomm (QCOM, Financial) is a chipmaker, but even more importantly, it is a royalty company. Qualcomm owns the IP that is required to hook up phones to 3G networks and the chipmaker receives between 3% and 5% of the price of every handset sold. LTE technology is emerging and Qualcomm's take on those phones may not be as outsized, but they own a lot of patents required for it as well. When the Chinese government began questioning whether what Qualcomm was doing was really valid, the stock took a big hit. Although U.S. and Western European markets are somewhat mature in terms of 3G penetration, future 4G and 5G phones will still likely be compatible and there is a solid runway for growth in emerging markets. The IDC predicts solid growth.
Worldwide smartphone forecast by OS, shipments, market share, growth and five-year CAGR (units in millions)
| Region | 2015* Shipment Volumes | 2015* Market Share | 2015* YoY Growth | 2019* Shipment Volumes | 2019* Market Share | 2019* YoY Growth | 5-Year CAGR |
| Android | 1,164.3 | 81.1% | 9.9% | 1,541.9 | 81.1% | 5.0% | 7.8% |
| iOS | 223.7 | 15.6% | 16.1% | 269.6 | 14.2% | 3.3% | 7.0% |
| Windows Phone | 36.9 | 2.6% | 5.8% | 67.8 | 3.6% | 12.8% | 14.2% |
| Others | 11.5 | 0.8% | -15.5% | 23.0 | 1.2% | 8.6% | 11.0% |
| TOTAL | 1,436.5 | 100.0% | 10.4% | 1,902.3 | 100.0% | 5.1% | 7.9% |
Source: IDC Worldwide Quarterly Mobile Phone Tracker, August 25, 2015.
*Forecast data
Given the quality of Qualcomm's intellectual property and the multiple decades of royalties they are likely to receive, even while the stock price recently dropped, it is not surprising that several gurus are highly interested in the company. David Rolfe's Wedgewood Partners just commented on the holding in their fourth quarter letter (emphasis mine):
Of note regarding our continued conviction to hold onto Qualcomm, we think Qualcomm's underperformance during the quarter was largely attributed to customer compliance issues and increasing regulatory scrutiny. Both pertain to Qualcomm's lucrative licensing segment, which accounts for the majority of the Company's profitability. Qualcomm continues to represent an excellent risk-reward trade-off, with shares trading at historically low multiples.
Ample growth catalysts include management's aggressive investment in increasing customer compliance with respect to signing licensing agreements, as well as retaking market share in its still-dominant chipset business.
We think the existential crisis that the market is pricing into Qualcomm’s shares is much too dire. First, China’s “techno-nationalism” has made it notoriously difficult for U.S. technology companies to compete on the Mainland2. We believe too that Qualcomm’s 2015 settlement with Chinese regulators over licensing practices represents a very unique and attractive new source of high-margin, revenue growth. To date, it has been difficult for Qualcomm to begin collecting, per their settlement. However, during the quarter, the Company announced that they had signed licensing agreements with four of the five largest Chinese mobile device original equipment manufacturers, so we expect to see licensing revenue ramp faster than the market is expecting.
Second, we think there is a good probability Qualcomm wins back share at some key chipset accounts, which should bode well for margins, especially as the Company has invested in a nimbler cost-structure.
Last, while we can attribute some of Qualcomm’s recent stumbles to a mobile handset industry that is entering a more mature phase of growth, the Company is relatively further along in the process of converting its business model to reflect those realities, and we expect double-digit earnings per share gains over the next few years.
We estimate that Qualcomm currently trades at a mid-single digit forward earning per share multiple, adjusted for net cash, which is a substantial discount to both the Russell 1000 Growth Index and S&P 500 Index. We expect continued significant buyback activity over the next several quarters, which should enhance the Company’s per-share growth prospects
Brian Rogers is also a fan, as he said during Barron's roundtable:
...Qualcomm has $70 billion in market value and $10 a share of net cash. The stock closed Friday at $45.88. In the year ended in September 2015, Qualcomm earned $4.60 a share. They will probably earn $4.90 in the September 2016 year.
...We think the licensing business is worth between $40 and $43 a share, based on a 20-year discounted cash-flow analysis, and the chip-making business is worth $16 a share, based on a multiple of 12 times earnings. The two businesses, plus the net $10 a share of cash—we only count the accessible cash that isn’t overseas—gets you to a $69 stock price.
With the company having struck a deal with the Chinese government and such an asset light cash generative business, a remaining danger is management destroying value by engaging in huge acquisitions or otherwise burning cash. Qualcomm intends to distribute three-fourths of free cash flow to shareholders through buybacks and dividends. The company also bought back a lot of stock in the past and pays a quarterly dividend.
The company trades at roughly 9.33x forward earnings. It trades at 7.21x EV/EBITDA with $17 billion in cash against $10 billion in long term debt.
