Qualcomm Stock: Still Growing and Priced Reasonably (NASDAQ: QCOM)

Burning on the landscape, presented by the letters Q, C, O and M.

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Take your cake, eat it, and throw the rest at Growth Bros.

QUALCOMM Incorporated (NASDAQ: QCOM) is a multi-tiered enterprise. Back in the mists of prehistory, its stubborn founders invented an encoding/decoding algorithm quickly titled Code Division Multiple Access; used in radio frequency systems, this allowed QCOM chips to aggregate more signals from more phones into more network cells than before. Over time, the world standardized cellular networks on CDMA and its derivatives; the European banter with the GSM slowly died out; and hop if this is not the case, Qualcomm has become a kind of monopoly. This is why they can grow so quickly (35% TTM revenue growth in the last quarter) and still generate so much cash (26% TTM pre-tax FCF margin in the same quarter).

If you’ve seen the market shred growth names lately, but deep down you know that growth never really goes away, it just retreats to recharge, you might consider buying Qualcomm stock right now. The fundamentals are very strong, the technical data on the stock charts is pointing towards our eyes (we’re all wearing glasses here, that said), and it looks like U.S. telecom capital spending could rise, which is likely to add favorable winds for the growth of QCOM rates.

Let’s start with recent income.

How were QCOM’s earnings?

Here are the numbers.

QCOM Finances

QCOM Financial Table (SEC company filings, YCharts.com, Cestrian analysis)

Growth accelerated significantly in the first quarter of FY9/22 (i.e. calendar quarter ending December 31, 2021), to +30% from 12% in the prior quarter . TTM’s revenue growth was +35%, which has trended lower over the last two quarters after blistering growth rates in the second half of 2020 and the first half of 2021. As you can see on TTM revenue line above, Qualcomm is a cyclical business; the market knows this and isn’t looking for the steady growth found in top subscription software companies.

Gross margins have remained in the 58-60% range for about a year; and you can see precisely the margin at which the board is running the business, as TTM’s EBITDA has been flat at 38%-41% for the past six quarters or so.

Capital expenditures are high for the business – about 6% of sales on average – and coupled with fairly poor working capital management lately (huge cash outflows to working capital in over the last two quarters) have depressed TTM without pre-tax debt cash flow margins at 26% from a recent high of 37% a few years ago. Again, the cyclical nature of the beast will impact margins, but it would be nice to see the company collect cash faster and pay people slower, to reverse this working capital trend.

The balance sheet may be optimized, but with net debt of just 0.3x EBITDA TTM and nearly $7 billion in liquid gross cash, the company can weather any rainy day.

So, profits and business fundamentals? Solid.

What about the stock, as opposed to the company?

QUALCOMM Stock Key Metrics

Let’s first look at valuation multiples.

QCOM valuation

QCOM Rating Board (Company SEC Filings, Ycharts.com, Cestrian Analysis)

5x TTM revenue / 12.3x TTM EBITDA and 18.7x TTM pre-tax FCF without leverage for a radio frequency oligopoly in a world where RF investments are about to increase? It doesn’t seem so bad to us.

What about the stock chart? Well, this one took a few times to get it right. Let us explain. (You can open a full-page version, here.)

QCOM Chart

QCOM Stock Chart (TradingView, Cestrian analysis)

At the start of 2019, the stock recorded an initial wave 1 up, peaking at $96 just before Covid hit Q1 2020. Cue a wave 2 down, almost perfectly hitting the Fibonacci retracement of 0.786 – or about $58 to $59/share. Next comes a major and major wave 3 – peaking just before the 3.618 extension of wave 1 – it’s a ginormo wave if you want the technical term. Then a shallow wave 4 which has so far touched a bit north of the 0.382 retracement level (but since we expect the 0.382 level – that’s $141 – to be a wave target 4, we can see a bit more decline before the stock goes up the hill).

A next cautiously assessed upside move would be wave 5 ending just around the $195 level – that’s a roughly 25% gain from here. It would be a new all-time high – waves 5 are supposed to peak above the previous wave 3 – and additionally, if you take the stock price change in wave 1 (= +$46/share or thereabouts ) and add it to the current stock price you get $201, which fits nicely with the idea of ​​a new ATH. (With a Wave 3 ginormo, you can often see a Wave 5 being equal in amplitude to a Wave 1.). So we have two voodoo calculations saying that $195 to $200 is a viable target for the stock.

Is Qualcomm Stock a good long-term investment?

We think so. We see no letup in the penetration of cellular network technology and other areas of QCOM’s expertise; and we believe that at the current entry valuation, there may be years of stock price growth ahead of us. Every company has competition, but QCOM doesn’t have so much thanks to the genius of early intellectual property and patent development.

Is the QCOM stock a buy, sell or hold?

On fundamentals and on technicals, we think QCOM is a compelling buy at this stage. We don’t have any positions in personal staff accounts at the time of writing, but we will probably open a new position (we had previously taken good gains in the $180 range before the stock went down) in the next few days.

Cestrian Capital Research, Inc – March 11, 2022.

Eleanor C. William