Qualcomm (NASDAQ:QCOM) continues to be in a correction mode after hitting a June peak of over $225. The inventory is at the moment buying and selling at over 20% under the latest peak regardless of beating income and earnings estimates within the latest earnings. Nevertheless, the inventory is sort of low cost after we have a look at a number of the key tailwinds in varied enterprise segments. The automotive enterprise reported an 87% YoY progress and has seen good progress projections for the longer term because the auto trade tries to construct “smarter automobiles”. The IoT section reported an 8% YoY decline in income, however new XR classes like Meta’s (META) Ray-Ban good 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 inside the chip trade and the inventory may very well be an excellent worth guess for long-term buyers. The dividend yield is over 2% and the corporate has an excellent historical past of giving robust dividend progress. The present dip within the inventory worth can present an excellent entry level for buyers seeking to make a long-term guess on this trade in a inventory that’s not costly.
Good tailwinds will inevitably be rewarded
Qualcomm has various tailwinds working in its favor. The automotive section continues to be a progress driver. The corporate reported $811 million in automotive income within the latest quarter which is 87% increased than the $434 million reported a 12 months in the past. Many automakers are working to achieve an edge by including good options inside their new fashions. This can be a long run pattern that may assist Qualcomm construct an excellent income stream within the subsequent few years.
Determine: Current income progress in key segments. Supply: Firm Filings
The IoT section 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 good glasses. Meta’s administration has talked about the speedy adoption of those glasses and has ordered them to ramp up manufacturing considerably. Meta can be seeking to have a 5% stake in EssilorLuxottica, the corporate that makes eyewear manufacturers like Ray-Ban.
Determine: Qualcomm highlighted the potential of good glasses in latest earnings. Supply: Firm Filings
Qualcomm not too long ago highlighted the potential of those good glasses. The present income price just isn’t sufficiently big to maneuver the needle however this class opens the door to various new merchandise which may enhance Qualcomm’s progress runway.
Determine: Enhance in ARM pocket book shipments. Supply: Tom’s {Hardware}
There have been varied estimates concerning the progress trajectory of ARM pocket book market share. Most have been very optimistic as new fashions launched by OEMs can enhance the attraction amongst prospects.
A really robust EPS progress trajectory
Qualcomm inventory just isn’t solely low cost on the present worth nevertheless it additionally exhibits good EPS progress. Double-digit EPS progress estimates for the following few years ought to present an excellent 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. Supply: Looking for Alpha
On the identical time, there have been various 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 cut back the valuation a number of.
Determine: Current up and down revisions for earnings and income. Supply: Looking for Alpha
Danger elements to the Bull thesis
Regardless of robust tailwinds, Qualcomm inventory can be exhibiting some danger elements. One of many key danger 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 by exhibiting the “uniqueness” of their chips. Apple has executed the identical with Intel chips changing them with M1 chips. The advertising of those Apple chips has definitely helped the corporate in enhancing Mac gross sales. Qualcomm nonetheless exhibits a really excessive focus of income from these corporations. Any decline in demand for Qualcomm chips ought to damage the corporate within the close to time period.
The expansion runway for automotive and IoT gadgets can be unsure. Each these segments have new merchandise coming to the market, however the long-term income era may very well be under expectations. This can be a huge danger for the inventory as lots is at stake attributable to these progress drivers.
Lastly, a giant danger is that the inventory turns into a worth entice 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 probably be restricted. One of many key elements behind future a number of enlargement would be the progress of recent income streams and new merchandise which may entice a excessive buyer base.
Future progress trajectory
Qualcomm is likely one of the most cost-effective chip shares obtainable in the marketplace. The corporate provides 2% of dividend yield. Over the past 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 exhibits 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 plenty of different sizzling chip shares.
Determine: Key metrics for Qualcomm, AMD, and TXN. Supply: Ycharts
The corporate has a double-digit EPS progress estimate which is sort of good and additionally it is exhibiting many Up revisions in earnings and income estimates. We might see a powerful bullish momentum within the inventory within the close to time period if the present EPS progress continues. When wanting on the danger/reward situations, the inventory seems to be an excellent guess and has various optimistic elements working in its favor together with an inexpensive valuation.
Investor Takeaway
Qualcomm is exhibiting good tailwinds in key segments. The automotive section continues to point out promise by having an excellent YoY pattern. Even within the IoT section, new merchandise are launched which may flip into a giant income stream for Qualcomm over the following few years. The danger issue attributable to back-integration by Apple and Samsung can damage the corporate however the danger/reward stability nonetheless favors the inventory.
The robust dividend yield and good dividend progress historical past ought to assist buyers 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 an excellent guess on the present worth.