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Introduction
ANY (NASDAQ:QCOM), a technology leader, specializing in the design and manufacture of semiconductors and wireless telecommunications equipment, is well poised to meet the growing and sustainable market demand. One of the main drivers of growth is the acceleration in adoption of 5G technology, which represents an opportunity for the company to grow its revenues. In addition, the location of Qualcomm’s manufacturing facilities is diversified, preserving the company’s productivity and efficiency compared to its competitors, whose manufacturing facilities are clustered in Asia eastern
Qualcomm ranks highly in our factor-based US large-cap stock ranking system. This article will explain the factors (quality, value and momentum) that encouraged us to include the stock in our portfolio and why they may influence the stock’s performance over the medium term.
Overview of segments
The company derives its revenue from three reportable segments:
QCT – Qualcomm CDMA Technologies (86% of 3Q-2022 revenue)*: designs and manufactures integrated circuits and systems software, with revenue from mobile phones, RF front-end, automotive and IoT, QTL – Qualcomm Technology Licensing (13.9% of revenue): covers the licensing and granting of rights to use the Qualcomm portfolio. QSI – Qualcomm Strategic Initiatives (0.1% of revenue): focuses on investments aimed at identifying new opportunities and helping to design and deploy new products and services.
*excluding the reconciliation element
Quarterly revenue performance of core business segments continues to grow at high growth rates despite global inflationary pressure and supply chain disruptions. This growth can be attributed to increased content consumption, which requires improved hardware capabilities.
Qualcomm
Solid foundations
Qualcomm established itself as the market leader while increasing its profit margins. Over the past few years, operating margin has increased from 16.7% in 2018 to 35.8%, indicating that management benefited from its previous strategic investment to generate quality revenue.
In terms of value returned to shareholders, the company’s dividend has been growing for the past 19 years, which, when annualized, provides a return of 2.05% at current market prices.
Looking for Alpha
In addition, the company is returning additional value by continually buying back its stock. Over the past three years, the company bought an average of 694 million shares per quarter.
YCharts
Qualcomm’s management expects non-GAAP EPS of $12.55 for fiscal 2022, which represents an increase of $4 compared to last year. And for the fourth quarter, the midpoint is $3.15, a quarterly increase of 6.4% sequentially. Based on these assumptions, Qualcomm is expected to deliver exceptional annual results.
For the upcoming period, Qualcomm announced that they have signed a new multi-year agreement with Samsung that will start in 2023. The agreement is expected to further increase the company’s revenue for Samsung Galaxy smartphones, including PCs , tablets, extended. reality, and much more.
Competitive advantage
Qualcomm has promising growth prospects, so we will analyze its market positioning using Porter’s Five Forces framework. This insight helps assess the many external business factors that influence any company’s competitive environment.
Threat of new entrants (low)
Current players in the semiconductor industry, including Qualcomm, Broadcom ( AVGO ), Advanced Micro Devices ( AMD ), and others, have spent aggressively on R&D and EPI, particularly on software development and hardware innovation to design and manufacture their products. So it is not easy for new companies to enter and compete. Only very large corporations willing to take very high risk can survive.
Threat of substitutes (low)
Although customers can replace products sold by Qualcomm, there is a relatively high switching cost for this decision due to compatibility and dependency issues. Companies should take into account the time and successful testing of the replaced products. Also, even if a customer is willing to accept the high cost, substitutes are not available due to extreme shortages in the chip industry.
Bargaining power of customers (moderate)
Currently, customers cannot easily replace the products, but we believe that they moderately affect Qualcomm’s growth prospects. For example, just three customers contributed to almost half of the company’s revenue, which increases the impact of concentration risk.
Qualcomm
Bargaining power of suppliers (high)
Although many of the raw materials used by semiconductor companies are standardized, availability is the main problem today. Therefore, suppliers can negotiate whenever supply chain networks are disrupted. In addition, as described in its annual report, Qualcomm depends on a limited number of third-party suppliers to procure, manufacture, assemble and test its products, placing the suppliers in an advantageous position.
Competitive rivalry (high)
While there are few competitors like Intel (INTC) and Broadcom, all companies in the industry have invested heavily in their products and offerings, making it difficult for them to exit. Therefore, they are aggressive in terms of their market share and are always looking for opportunities to expand or consolidate through M&A activity.
Classifications
Qualcomm ranks in the top decile based on our multi-factor ranking system, making it an attractive investment opportunity. It is currently included in our factor-based US growth stock strategy with a score of 98.1, as shown below.
Based on factors
As shown in the chart below, during 2019, Qualcomm showed a radical change in ranking and was among the top decile of stocks in our universe. Since then, the share price has been on a steady upward trend.
set of facts
Our ranking approach is based on the analysis of nine indicators divided between quality, value and momentum factors. We assign a weight to each factor and arrive at the final rank after normalizing it to a percentile. You can refer to the entire ranking process described in the Factor-Based US Equity Strategy presentation.
Now, let’s examine some of these factors and explain how they contributed to Qualcomm’s excellent ranking compared to its peers.
quality
Trailing twelve-month ROE and gross profitability metrics are among our quality factors. Qualcomm’s ROE (TTM) has continuously increased and has gone from a negative number in 2018 to levels above 100% since the beginning of 2021 (107.54% currently). In addition, the ROE is higher than its main competitors, such as Broadcom Inc., Intel Corp. and Advanced Micro Devices Inc., which have ROE ratios of 38.09%, 27.14%, and 20.32%, respectively.
Likewise, gross profitability, calculated as Gross Profit / Total Assets, has improved considerably in recent years, showing greater profitability, and currently maintains its upward trajectory.
set of facts
value
Based on our backtesting, we found that assessing how much EBITDA the company generates for each unit of enterprise value (after adjusting for R&D) is a good value driver for identifying companies with higher profitability efficiency . Qualcomm’s ratio has increased considerably after the pandemic, as shown in the chart below.
set of facts
moment
In terms of driving factors, one of the metrics used is the price tilt, which helps identify medium-term bullishness. Although this factor has declined since the beginning of the year due to bearish market sentiment, it currently indicates a potential upward trend. As shown in the chart below, the trend is showing bearish signs. This factor is determined by dividing the 63-day VMA (volume-weighted moving average) by the 252-day VMA.
set of facts
Qualcomm outperforms its rivals in the semiconductor industry when it comes to balancing quality and value. We plotted ROE (x-axis) versus REVU (y-axis), and as indicated in the chart below, Qualcomm is reasonably valued with good upside potential.
set of facts
Investment risks
Although Qualcomm has an attractive range, its valuation and growth potential are vulnerable to several threats, of which we will mention a few:
Recession risk: Due to the rising interest rate environment along with other macroeconomic factors, such as slowing economic activity, many analysts expect a recession in late 2022 or early 2023. Thus, demand for the company’s products such as integrated circuits and royalty income earned could decrease; International political relationsincluding trade protection policies or other governmental and regulatory actions, could limit or prevent the company from achieving its full potential growth in the future (the trade war was a clear example); Continuous research and development: the company operates in a technological industry that is in an uninterrupted development cycle that justifies the need to allocate a large part of the gross profit to R&D to maintain its competitive positioning in the market. However, expenses incurred may not necessarily lead to additional income in the future.
conclusion
Finally, Qualcomm’s business was resilient during highly volatile periods and proved less cyclical than other companies. Despite the high R&D required to maintain a competitive advantage, the current management strategy generated higher profit margins. The company is well positioned to grow as a semiconductor leader given current and long-term industry tailwinds driven by 5G, IoT and the metaverse.
Additionally, QCOM has a strong mix of quality, value and momentum factors in our universe of US large-cap stocks, making it a good growth at a reasonable price. [GARP] investment opportunity.
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