Qualcomm: Sturdy Tailwinds Can Show Naysayers Improper (NASDAQ:QCOM)

Qualcomm (NASDAQ:QCOM) continues to be in a correction mode after hitting a June peak of over $225. The inventory is presently buying and selling at over 20% beneath the latest peak regardless of beating income and earnings estimates within the latest earnings. Nonetheless, the inventory is sort of low cost once we take a look at a few of the key tailwinds in varied enterprise segments. The automotive enterprise reported an 87% YoY progress and has seen good progress projections for the long run because the auto trade tries to construct “smarter automobiles”. The IoT phase reported an 8% YoY decline in income, however new XR classes like Meta’s (META) Ray-Ban sensible glasses present enormous potential.

The EPS estimate for FY26 is $12.5 which supplies the inventory a ahead PE of solely 13.5. This is likely one of the lowest multiples throughout the chip trade and the inventory might be worth wager for long-term traders. The dividend yield is over 2% and the corporate has historical past of giving robust dividend progress. The present dip within the inventory value can present entry level for traders trying to make a long-term wager on this trade in a inventory that isn’t costly.

Good tailwinds will inevitably be rewarded

Qualcomm has quite a few tailwinds working in its favor. The automotive phase continues to be a progress driver. The corporate reported $811 million in automotive income within the latest quarter which is 87% larger than the $434 million reported a yr in the past. Many automakers are working to achieve an edge by including sensible options inside their new fashions. It is a long run pattern that can assist Qualcomm construct income stream within the subsequent few years.

Determine: Latest income progress in key segments. Source: Firm Filings

The IoT phase reported a YoY decline of 8% however new merchandise are being launched on this house which ought to assist the corporate within the subsequent few quarters. One of the fascinating is Meta’s Ray-Ban sensible glasses. Meta’s administration has talked about the fast adoption of those glasses and has ordered them to ramp up manufacturing considerably. Meta can also be wanting to have a 5% stake in EssilorLuxottica, the corporate that makes eyewear manufacturers like Ray-Ban.

Determine: Qualcomm highlighted the potential of sensible glasses in latest earnings. Source: Firm Filings

Qualcomm lately highlighted the potential of those sensible glasses. The present income price is just not sufficiently big to maneuver the needle however this class opens the door to quite a few new merchandise which might enhance Qualcomm’s progress runway.

Determine: Improve in ARM pocket book shipments. Source: Tom’s {Hardware}

There have been varied estimates in regards to the progress trajectory of ARM pocket book market share. Most have been very constructive as new fashions launched by OEMs can enhance the attraction amongst prospects.

A really robust EPS progress trajectory

Qualcomm inventory is just not solely low cost on the present value however it additionally reveals good EPS progress. Double-digit EPS progress estimates for the following few years ought to present tailwind to the inventory. The EPS estimate for FY25 is $11.24 giving the ahead PE a a number of of 15.08. The EPS estimate for FY26 is $12.5 giving it a low ahead PE a number of of 13.5.

Determine: Ahead PE a number of for Qualcomm. Source: In search of Alpha

On the identical time, there have been quite a few Up revisions for earnings and income within the final three months. Qualcomm inventory noticed 27 up revisions for EPS in comparison with solely 4 Down revisions. These Up revisions ought to enhance the sentiment towards the inventory and scale back the valuation a number of.

Determine: Latest up and down revisions for earnings and income. Source: In search of Alpha

Threat elements to the Bull thesis

Regardless of robust tailwinds, Qualcomm inventory can also be exhibiting some threat elements. One of many key threat is the flexibility of Apple (AAPL) and Samsung to combine their very own chips into their gadgets. Each these giants have huge sources and they’re investing closely in constructing their chips. In addition they acquire an edge in advertising and marketing by exhibiting the “uniqueness” of their chips. Apple has executed the identical with Intel chips changing them with M1 chips. The advertising and marketing of those Apple chips has actually helped the corporate in bettering Mac gross sales. Qualcomm nonetheless reveals a really excessive focus of income from these firms. Any decline in demand for Qualcomm chips ought to harm the corporate within the close to time period.

The expansion runway for automotive and IoT gadgets can also be unsure. Each these segments have new merchandise coming to the market, however the long-term income era might be beneath expectations. It is a large threat for the inventory as rather a lot is at stake on account of these progress drivers.

Lastly, an enormous threat is that the inventory turns into a price lure within the subsequent few years. Regardless of progress in EPS, if Wall Avenue doesn’t enhance the valuation a number of, the return potential for the inventory will likely be restricted. One of many key elements behind future a number of growth would be the progress of recent income streams and new merchandise which might entice a excessive buyer base.

Future progress trajectory

Qualcomm is likely one of the most cost-effective chip shares out there available on the market. The corporate provides 2% of dividend yield. During the last 10 years, the dividend has elevated from $0.42 to $0.85. This is the same as CAGR progress of seven%. The payout ratio is 41% which reveals that the corporate has sufficient room for additional dividend progress if the EPS progress continues. The ahead PE a number of is 16.8 in comparison with over 40 for AMD (AMD) and lots of different sizzling chip shares.

Determine: Key metrics for Qualcomm, AMD, and TXN. Source: Ycharts

The corporate has a double-digit EPS progress estimate which is sort of good and it’s also exhibiting many Up revisions in earnings and income estimates. We may see a robust bullish momentum within the inventory within the close to time period if the present EPS progress continues. When wanting on the threat/reward eventualities, the inventory seems to be wager and has quite a few constructive elements working in its favor together with an inexpensive valuation.

Investor Takeaway

Qualcomm is exhibiting good tailwinds in key segments. The automotive phase continues to point out promise by having YoY pattern. Even within the IoT phase, new merchandise are launched which might flip into an enormous income stream for Qualcomm over the following few years. The danger issue on account of back-integration by Apple and Samsung can harm the corporate however the threat/reward stability nonetheless favors the inventory.

The robust dividend yield and good dividend progress historical past ought to assist traders enhance their returns. The inventory is buying and selling at solely 13.5X FY26 EPS estimate which is likely one of the lowest within the chip trade. Any future up revisions ought to assist present a tailwind to the inventory making it wager on the present value.