Qualcomm Inc. (QCOM, Financial) recently reported earnings results that caused the market to bid up shares nearly 13% in a single trading session. The stock is up another 6% since.
The company’s business has greatly improved in recent years due to the combination of a licensing dispute settlement with Apple Inc. (AAPL, Financial) and the rollout of 5G.
But even after the recent share price gains, Qualcomm’s stock has a valuation that is in-line with its long-term average. Prospective investors may have missed the recent increase in value, but the company is well positioned to take advantage of 5G, which could make today’s stock price look like a bargain down the road.
Earnings highlights
Qualcomm announced its fourth-quarter and fiscal year 2021 earnings results on Nov. 3.
For the quarter, revenue surged nearly 44% to $9.3 billion. This was also $500 million ahead of what Wall Street analysts had anticipated. Adjusted net income of $2.9 billion was a 75% improvement from the prior year while adjusted earnings per share of $2.55 was a 76% increase from the prior year. Adjusted earnings per share was 29 cents better than expected.
For full fiscal 2021, revenue improved 55% to $33.5 billion. Adjusted net income of $9.8 billion and adjusted earnings per share of $8.54 were both higher by 104%.
Qualcomm CDMA Technologies, or QCT, generated revenue of $7.7 billion, a 56% improvement from the prior year. Qualcomm Technology Licensing, or QTL, increased 3% to $1.6 billion.
Strength was seen in every aspect of the QCT business. Handsets, which accounted for 61% of total QCT revenue, grew 56% to $4.7 billion as the 5G rollout continues and demand for devices continues to be strong. Internet of Things, which accounted for a fifth of revenues, grew 66% while the two smaller business, RF front-end and automotive, were higher by 45% and 44%, respectively. For the year, all of these business grew at least 51%, led by a 67% improvement in IoT and a 61% gain in handsets.
Qualcomm outperformed the guidance that it provided before the start of the fourth quarter, with most figures coming in above the top-end of the various expected ranges. The lone metric to not clear the high end was QTL revenue, which was still above the midpoint of guidance.
Qualcomm repurchased 5 million shares during the quarter at an average price of $154. Share repurchases for the year totaled 24 million at an average price of $140. Considering the price of the stock is currently in the low-$160 range, it appears the company made a good use of capital.
According to analysts surveyed by Yahoo Finance, Qualcomm is expected to earn $10.42 in fiscal year 2022, which would be a 22% improvement from the prior year.
Takeaways
Qualcomm’s year-over-year results were excellent, both for the quarter and for the fiscal year.
The most recent quarterly results weren’t against easily comparable figures. In fact, 2020 marked some of the best results that Qualcomm has produced in recent years. Last year’s fourth quarter saw adjusted earnings per share and revenue grow 86% and 35.4%, respectively. The company posted an 18% improvement in adjusted earnings per share and a 12% increase in revenue for fiscal year 2020.
Those gains are seen as likely to continue into fiscal year 2022. Adjusted earnings per share are projected to be nearly 150% higher than fiscal year 2020.
Growth and expected gains of this magnitude come from strength in the different businesses within the company as well. QCT revenue improved 38%, leading to a two-year growth rate of 94%. This business, the largest within Qualcomm, has nearly doubled over the last two fiscal years.
A good portion of this growth has been driven by premium products and 5G. Devices containing Snapdragon, an application processor common in high-end smartphones, had a 21% increase in shipments last quarter. Snapdragon is in use amongst all leading 5G Android smartphones. Leadership noted on the conference call that Snapdragon equipped smartphones produced revenue that was 40% above the nearest competitor.
Combining this with higher 5G coverage area should be able to propel near-term results for this business. Leadership now expects to ship 500 million to 550 million 5G handset units in calendar year 2021, up from 450 million to 550 million units previously. Clearly, the company is expecting a sizeable uptick in 5G ready devices. Leadership noted that it sees a mid- to high single digit growth rate of 3G/4G/5G devices compared to calendar year 2020.
It's not just handsets that are performing well. The other areas of the business, IoT, RF front-end and automotive, all continue to perform well. Non-handset revenue in the QCT segment grew 55% for the fourth quarter and 69% for the fiscal year. Though smaller, these businesses help diversify Qualcomm away from handsets, giving it another outlet for customers and some protection in case that market softens.
Valuation analysis
Shares of Qualcomm trade close to $163. Using analysts' estimates for the year, the stock has a forward price-earnings ratio of 15.6. According to Value Line, this compares to the five- and 10-year average price-earnings ratios of 17 and 15.6, respectively.
Given the strength of recent results and the tailwinds from 5G, I believe an appropriate valuation target is 16 to 18 times earnings. Applying expected earnings per share to this results in a price target range of $167 to $188. Therefore, shares could return as much as 15.3% from the current price.
This would be in addition to the stock’s dividend yield, which is 1.7% at the moment. Qualcomm has a decent dividend growth history, raising its dividend for 19 consecutive years with a compound annual growth rate of almost 13% over the last decade.
Combining the potential share price return with the dividend yield, total returns could reach into the high teens range.
