Despite strong performance last year, Qualcomm (Nasdaq: QCOM) the stock has a lot more upside potential in the future. Specifically, the continued wave of 5G connections combined with Qualcomm’s significant competitive advantage make the stock attractive. The report reviews the business, its unique licensing model, Nuvia’s acquisition, valuation, and risks, and concludes with an investment opinion.
overview:
Headquartered in San Diego, California, Qualcomm is in the business of providing wireless technology solutions and intellectual property. The company has 41,000 employees and he has nearly 13,000 customers in over 40 countries and multiple industries. Qualcomm’s technology and products are used in mobile phones, smartwatches, laptops, networking equipment, automotive telematics and infotainment systems, and other his IoT devices. The company’s registered trademarks include Qualcomm, Snapdragon, MSM, Hexagon, and Adreno. Qualcomm primarily operates under his two business segments, Qualcomm CDMA Technology (“QCT”) and Qualcomm Technology Licensing (“QTL”). QCT accounts for the majority of the company’s revenue (76.6%) and QTL accounts for the majority of profits (EBT share: 55.5%). The details of the company’s main segments are as follows.
QCT (Qualcomm CDMA Technology): In this segment, the company sells integrated circuits and system software based on 3G, 4G, 5G or other technologies for use in mobile and automotive Snapdragon platforms, IoT and other wireless connected devices such as Hexagon. increase.™ Processor, Adreno™ such as GPUs. We also sell RF front-end (“RFFE”) products used in various IoT devices to reduce power consumption and improve radio performance. Most of QCT’s revenue comes from the sale of products used in mobile phones.
QTL (Qualcomm Technology Licensing): In this segment, Qualcomm may receive royalties, or the company’s intellectual We derive revenue from the grant of licenses and rights to use property.in the segment EBT margin of 68%.
Unique licensing business model
Qualcomm has a unique and controversial business model commonly referred to as “no licenses, no chips”. Under this business model, Qualcomm’s competitors sell chips manufactured using Qualcomm’s patented technology only to customers who have licensed patents from Qualcomm (phone manufacturers such as Apple (AAPL) and Huawei). can. This will force phone makers to buy licenses from Qualcomm even if they don’t buy chips from Qualcomm. This received a lot of criticism from smartphone makers and even developed into lawsuits. That said, companies are often forced to pay royalties and license fees to Qualcomm for “industry standard” technology patents that are deemed essential. Apple and Huawei, which refused to pay for , dropped their lawsuits in April 2019 and July 2020, respectively. In addition, they have since entered into a new multi-year licensing partnership with Qualcomm and paid a large lump-sum payment pursuant to the settlement agreement. This included previously unpaid royalties.
In August 2020, the company won an FTC antitrust lawsuit over this unique licensing business model. In 2019, a U.S. District Court judge ruled in favor of the FTC because Qualcomm may have taken a heavy toll on licensing revenue. But a recent victory overturned previous rulings and validated the company’s licensing business model. The court defined this strategy as “overcompetitive” and not anticompetitive.
Note that the Apple and Qualcomm story could have a few more chapters as Apple works to insource semiconductor components for mobile phones. It may lead to loss of revenue for Qualcomm. But his Qualcomm dominance in smartphones and his 5G technology means it will be difficult to conspicuously remove the company from the smartphone supply chain.
Long-awaited 5G tailwind restores growth momentum
Qualcomm’s Serviceable Addressable Market (SAM) is expected to grow at a three-year CAGR of 15.4% from $65 billion in 2019 to $100 billion in 2022, according to the company’s 2019 Analyst Day presentation. . The handset market included in SAM is expected to grow at a three-year CAGR of 10% from $26 billion in 2019 to $35 billion in 2022, with RF at the forefront, while the IoT market It is expected to grow at a three-year CAGR of 7% from $17 billion to $21 billion in 2022. The automotive markets are expected to grow at a three-year CAGR of 12% each. Overall, there is a lot of growth here.
That said, we expect the company to see much faster growth in the short to medium term as the transition to 5G gains momentum. With 100x network efficiency and up to 100x speed improvement, it is expected to be a significant upgrade. As users have great motivation to upgrade to his 5G, a strong value proposition will greatly accelerate the rollout of 5G and increase mobile phone sales. In addition, it will lead to increasing applications of wireless his networks not only in the automotive industry, but also in the manufacturing, energy, logistics, gaming and healthcare industries. Expanding applications across multiple industries will bring greater market opportunities for Qualcomm. In addition, higher smartphone sales are likely to boost Qualcomm’s chipset sales and licensing revenue. Improvements in technology also lead to higher revenues per mobile phone. The company describes 5G as follows: “THE BIGGEST OPPORTUNITY IN OUR HISTORY“ on the Q4 conference call.
Dominate the market by being at the forefront of innovation
Qualcomm has dominated the wireless space with industry-leading technology. With an intellectual property portfolio of over 140,000 current and pending patents, he continues to invest heavily in R&D, which reached nearly 20% of 2020 revenue. So far, the company has invested more than $60 billion of his in research and development activities. This has allowed the company to stay at the forefront of innovation and stay ahead of its competitors.
The Company’s competitors include Broadcom (AVGO), HiSilicon, MediaTek (OTCPK:MDTKF), NVIDIA (NVDA), NXP Semiconductors (NXPI), Korvo (QRVO), Samsung (OTCPK:SSNLF) and Skyworks. (SWKS), Texas Instruments (TXN), and others. ), and UNISOC. It also competes with Huawei, Nokia (NOK), and HTC (OTC:HTCKF) for mobile technology solutions.
Competition is fierce, but the company’s strong patent portfolio allows it to dominate the market and earn royalties from each product (even its competitors) manufactured using its patented technology. , is in a unique position. According to a 2019 IPWatchdog presentation, Qualcomm holds the largest patent portfolio in terms of value, significantly outperforming the following competitors:
Source: IP Watchdog
According to the IEEE Spectrum website, Qualcomm ranks first in the telecommunications/internet equipment category, scoring more than twice as many as its next competitor in terms of patent value.
The company’s closest competitor is MediaTek, and both companies each hold nearly 30% market share in the mobile phone chipset market. That being said, Qualcomm enjoys strong market leadership in his 5G chipset market, with a market share of 39% in Q3 2020. The entire chipset market. In November 2020, Qualcomm introduced his Snapdragon 888 mobile platform to boost its 5G capabilities. This can help reduce device costs and extend battery life. The company recently launched the Snapdragon 480 5G chipset, bringing his 5G capabilities to budget smartphones. This initiative will help Qualcomm drive market penetration in emerging markets as well.
Acquisition of Nuvia to further amplify Qualcomm’s technological advantage
Qualcomm recently announced the acquisition of Nuvia, a company focused on designing high-performance processors. The deal, he said, is worth $1.4 billion, which is less than 1% of Qualcomm’s market capitalization, but he believes the deal will play a much bigger role strategically.
Nuvia’s CPU design is expected to power Qualcomm’s Snapdragon (mobile SoC), laptops, and other IoT devices with distinct industry applications such as automobiles. Nuvia’s CPUs compete directly with ARM’s processor IP. As such, the acquisition will not only help Qualcomm reduce its reliance on ARM for licensing its computing cores, but it will also help reduce the licensing costs paid to ARM, which was acquired by Qualcomm’s competitor Nvidia. increase. We recently shared a report and video about Nvidia (including a discussion of the ARM acquisition) here and here respectively.
Both top and bottom lines confirm resurgence
Qualcomm has had subpar revenue growth in recent years due to a lack of significant technology upgrades and lawsuits with a handful of high-profile customers. Revenue declined at his CAGR of -1.4% over his 5-year period, and EBIT margin shrunk significantly from his 2015 fiscal year to 2020 fiscal year.
That said, with the move to 5G and an enhanced licensing business model, the company expects to regain growth momentum.
In fact, revenue in Q1 2021 was $8.24 billion, up 62% year over year. CEO Steve Mollenkopf said:
“We delivered an exceptional quarter, with strong 5G demand in handsets and growth in RF front-end, automotive and IoT adjacencies driving revenue more than doubling year-over-year and record revenue in our chip business. …” and “We continue to be well-positioned as 5G continues to grow and our core technology roadmap extends into adjacent industries.”
Also, as technology improves, chipset prices are expected to be higher, resulting in higher profitability and increased revenue. In addition, increasing applications across multiple industries are likely to further increase the demand.
Access to sufficient growth capital with solid cash flow and balance sheet
Qualcomm has a strong financial position with a liquidity position of $12.3 billion, including cash, cash equivalents and securities, and a net debt position of $15.7 billion as of December 2020. We believe the company’s strong cash flow and balance sheet metrics will help support it. Incremental R&D, capital expenditures and inorganic initiatives that may be required to fully reap the benefits of the 5G tailwind. Additionally, the company has bought back about 25% of its outstanding shares for his $30 billion since 2016 to bolster shareholder wealth.
Valuations remain attractive
Qualcomm’s stock has surged 68% over the past year on strong 5G tailwinds and big legal wins, resulting in a five-year average of 4.8x.
That said, given its strong operating margin and expected double-digit earnings growth, the stock is still trading at an attractive 5.4x futures price to sales.
Source: Seeking Alpha, Left Brain Investment Research
To put it a little further into perspective, two-thirds of Wall Street analysts covering stocks rate Qualcomm as Buy, with a price target of $172 (a 17.4% gain over current market prices). means rising).
However, as noted above, we believe the upside will be dramatically greater based on the long-term and massive 5G market opportunity and the company’s strong competitive advantage.
Customer concentration risk:
One of the risks Qualcomm must satisfy is customer concentration risk. Specifically, Qualcomm’s top four customers account for nearly half of the company’s revenue. Losing a key customer can disproportionately affect a company’s financial prospects. That being said, Qualcomm’s integral technology and unique licensing business model greatly limit this risk.
Conclusion:
Qualcomm is one of the most attractive strategies in the 5G ecosystem. And as 5G grows, he expects his industry-leading Qualcomm position to lead to higher product prices and significantly higher profitability. In addition, the stocks trade at attractive valuation multiples, offering attractive risk and reward opportunities. If you’re looking for a very attractive growth stock, Qualcomm stock is definitely worth considering.
