Qualcomm is the innovator of code division multiple access technology, a key communications standard used in wireless networks. The company has leveraged its CDMA expertise into the semiconductor market, where the firm is a key supplier of chips to wireless handset makers and also generates royalty revenue by licensing its intellectual property.
Qualcomm holds thousands of patents related to CDMA, and this extensive intellectual property (IP) portfolio is the source of the firm’s wide economic moat. Essentially, phones are unable to connect to the CDMA network without paying a royalty to the company; Qualcomm’s licensing arrangements with virtually every handset maker allows the firm to collect about 3%-5% of the total price of each handset unit sold. Qualcomm is poised for strong licensing revenue growth and improved profitability during the next several years, as all 3G (third-generation) wireless networks use CDMA technology. Going forward, Qualcomm also has key patents that are used in all 4G technologies, such as Long Term Evolution (LTE).
The company’s wireless baseband chip business has been successful in both basic handsets and smartphones, but Qualcomm should see healthy growth as the shift toward high-end smartphones requires more powerful– and higher priced– applications processors from Qualcomm and others. Furthermore, Qualcomm’s processors are well-positioned to capitalize from the emergence of PC-like tablets. Qualcomm benefits from a more favorable chip product mix toward high-end Snapdragon processors, contributions from recently acquired Atheros, and healthy licensing revenue driven by higher handset average selling prices as smartphones become a greater proportion of the overall handset industry.
Latest from world of QCOM
“Qualcomm chips are in the latest iPads and iPhones from Apple, based on teardowns of those machines, since Apple recently chose Qualcomm over Intel as a supplier of communications chips, according to Barron’s.” Infact the 3G and 4G LTE wireless chips of all Ipads and Iphones, that include baseband chip and transreciever chip, are QCOM chips. Even in latest Ipad, the A5X processor is manufacuterd by QCOM.
“Other customers include HTC, Nokia, Samsung, and Motorola, and chipsets for video and graphics could drive Microsoft’s Windows 8 tablets when those Microsoft products reach the market, the investors’ weekly said.”
And Hence the revenue has grown by 36% in FY 2011 and the expectation for FY2012 growth is at 23%. But based on the recent reports from Barron the growth might end up exceeding 30%.
So based on the above information, I believe the company will earn more than earlier estimate of 3.75$ for FY 2012. And just going by the forward P/E of 20 we are looking at proce target of 75$. Over last 5 years the P/E of QCOM have ranged from 13-25.
To get a Discounted Cash Flow valuation of the company, we use 36% revenue growth for 2011 and 30% for 2012. Being on the conservative side we assume that the company will grow 5% on average from 2013 to 2016. Considering 9-10% as cost of equity, we are looking at a fair value of 70-73$. The reason fow such low wacc is the almost zero debt, earnings stability, low beta of 1.09 and cash flow yied of 5%.
Lastly lets quickly go over the earnings of QCOM.
|Year||EPS||High ($)||Low ($)|
|Last 4 Quarters||EPS||% Change||Sales (million)||%Change||Fund Owners|
|P/E 5 Year Range||13-25|
|R&D Expense of sales||20%|