Qualcomm (QCOM, Financial) is widely held by gurus. Recent converts include Seth Klarman (Trades, Portfolio), Daniel Loeb, Caxton Associates (Trades, Portfolio) and Julian Robertson (Trades, Portfolio).
The company is perhaps best known for its Snapdragon processor that dominated mobile devices for a while until OEM came up with competitive gear. Today about 75% of the company’s revenue is purely derived through licensing. Every device out there utilizing 3G or 4G technology needs to pay Qualcomm a fee.
Lately the stock has traded down because Apple (AAPL, Financial) is trying to muscle its way out of the royalty obligation. The U.S. has a long history of upholding intellectual property rights and it seems unlikely that the giant tech company will succeed. Where Chinese efforts were only modestly successful I just don’t see it happening in the U.S.
R&D
I looked into Qualcomm’s spending on R&D and at 22% it is in line with comps. Intel (INTC, Financial) spends 21.2%, Advanced Micro Devices (AMD, Financial) spends 23.33% and NVIDIA (NVDA, Financial) spends 20.26%.
If you consider that Qualcomm derives most of its revenue from royalties on IP that will remain a necessity for every connected mobile device manufactured, its R&D starts to look really high. This isn’t a firm that constantly needs to come up with another product cycle. This R&D isn’t required to maintain the current cash flow and therefore it is a free option on innovation. Theoretically the company could also drop the 22% of revenue it is spending on R&D and still maintain a large percentage of cash flow for quite a few years. The fact management believes it is better to spend it is encouraging.
Growth
The company has a 10-year EBITDA growth rate of 12.3% per year. Its intellectual property is essential to expensive devices that are critical to many people’s lifestyles. The royalties represent only a fraction of the device cost, but no one wants a smartphone that is not 3G or 4G compatible. Not even in a 5G world. Not to mention Qualcomm is spending heavily on R&D and in the process of acquiring NXP Semiconductors (NXPI, Financial) to corner the chip market in the future of auto.
Valuation
The company pays nearly a 4% dividend and has virtually no net debt. On an EV/EBITDA basis it trades at only 12x. Its 19x price-earnings (P/E) and 15x free cash flow are a little bit less attractive, but you have to put that in the context of this being a much safer company, with a very high quality revenue stream trading at multiples that still represent a discount to the Standard & Poor's 500 averages. The average for the S&P's 500 is to trade at 21x earnings and 13x free cash according to MS data.
Disclosure: No position.
