Qualcomm Stock Has New Growth Drivers
- QCOM has developed new products and applications that could increase its revenue and profits and drive its stock higher.
- The collaboration with Microsoft to enable Windows 10 on mobile devices will benefit both companies.
- With its new 10nm server processor, QCOM could gain market share from Intel in the fast-growing market for a processor for data centers.
As the smartphones market is slowing down, Qualcomm (NASDAQ:QCOM) the world leading supplier of chips for smartphones, has developed new products and applications that could increase its revenue and profits and drive its stock higher. On December 8, Qualcomm announced a collaboration with Microsoft (NASDAQ:MSFT) to enable Windows 10 on mobile devices by using Qualcomm's next-generation Snapdragon processors. Cristiano Amon, executive vice president, Qualcomm Technologies, commented:
“Qualcomm Snapdragon processors offer one of the world’s most advanced mobile computing features, including Gigabit LTE connectivity, advanced multimedia support, machine learning and superior hardware security features, all while supporting thin, fan-less designs and long battery life. With compatibility with the Windows 10 ecosystem, the Qualcomm Snapdragon platform is expected to support mobility to cloud computing and redefine how people will use their computer devices.”
In my opinion, the collaboration with Microsoft to enable Windows 10 on mobile devices will benefit both companies. Running Windows 10 with applications like "Office" on tablets would transform these devices into a real computer, enabling users to work on tablets not just reading documents and browsing the web.
In another significant development, on December 7, Qualcomm announced that it conducted a live demonstration and provided a commercial sampling of the world’s first 10-nanometer server processor. According to the company, the new processor is well fitted to confront most typical data centers workloads, since it is optimized to deliver both power efficiency and high performance.
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Anand Chandrasekher, senior vice president, and general manager, Qualcomm Datacenter Technologies, explained:
“The Qualcomm Centriq 2400 series processors will drive high performance, power efficient ARM-based servers from concept to reality. Qualcomm requires the leading edge of integrated circuit technology to deliver high performance at low power for the newest premium smartphones. We are first in 10nm IC technology for mobile, and leveraging our expertise in ARM processors and system on chip design, we are the first with our Qualcomm Centriq family of server processors to bring the leading edge to the datacenter.”
As I see it, with its new innovative 10-nanometer server processor, Qualcomm could gain market share from Intel (NASDAQ:INTC), which dominates the fast-growing market for a processor for the world's cloud-based data centers.
Latest Quarter Results
On November 2, Qualcomm reported strong fourth-quarter fiscal 2016 financial results, which beat EPS expectations by a big margin of $0.15 (13.3%). Revenue for the fourth quarter rose 13% year over year to $6.2 billion, also topping analysts' estimates of $5.9 billion. Qualcomm significantly beat earnings estimates in its last seven quarters, as shown in the table below.
In the report, CEO Steve Mollenkopf said:
“Our fiscal fourth quarter EPS was above the high end of our expectations, reflecting new license agreements in China and strong chipset shipments. We are forecasting continued growth of global 3G/4G device shipments in calendar year 2017, led by growing demand in emerging regions. We are well positioned to extend our mobile technology leadership and footprint into attractive growth opportunities, accelerated by our recently announced agreement to acquire NXP.”
Qualcomm Stock Performance
Since the beginning of the year, QCOM's stock is already up 38% while the S&P 500 Index has gained 10%, and the Nasdaq Composite Index has gained 8%. However, since the beginning of 2012, QCOM's stock has gained only 25.3%. In this period, the S&P 500 Index has increased 79.7%, and the Nasdaq Composite Index has risen 109%. According to TipRanks, the average target price of the top analysts is at $73.50, representing an upside of 7.3% from its December 9 close price of $68.52, however, in my opinion, shares could go even higher.
Qualcomm has compelling valuation metrics; the trailing P/E is at 17.98, and the forward P/E is low at 13.73. The price to cash flow is at 14.33, and the current ratio is very high at 3.10. Moreover, its Enterprise Value/EBITDA ratio is low at 11.44, and its PEG ratio is also low at 1.38.
Furthermore, Qualcomm's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
Qualcomm has recorded considerable growth in the past few years. The company's annual average sales growth over the last five years was high at 9.5%, and the average EPS growth was at 7.1%. The average annual estimated EPS growth for the next five years is very high at 10.50%.
Dividend and Share Repurchase
Qualcomm has generated strong cash flows and is returning significant capital to its shareholders through stock buybacks and increasing dividend payments. During fiscal 2016, the company returned $6,912 million to its stockholders, including $2,990 million, or $2.02 per share, of cash dividends paid and $3,922 million through repurchases of 73.8 million shares of common stock.
The current annual dividend yield is pretty high at 3.09%, and the payout ratio is at 52.5%. The annual rate of dividend growth over the past three years was very high at 19%, over the past five years was also very high at 20.1%, and over the last ten years was high at 17%.
As the smartphone market is slowing down, Qualcomm has developed new products and applications that could increase its revenue and profits and drive its stock higher. The collaboration with Microsoft to enable Windows 10 on mobile devices will benefit both companies. What's more, with its new innovative 10-nanometer server processor, Qualcomm could gain market share from Intel in the fast-growing market of processors for cloud-based data centers. Qualcomm has compelling valuation metrics, and it generates strong cash flow and returns substantial value to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $73.50, representing an upside of 7.3% from its December 9 close price of $68.52, however, in my opinion, shares could go even higher.
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