Semiconductor and software firm Qualcomm (NASDAQ:QCOM) is a dominant force in the smartphone semiconductor market, a fact that has allowed its shares to generate quite strong returns in recent years.
Recently, however, QCOM is sold off on a combination of worries about its growth and the potential negative impacts rising tariffs could have on the business.
Is Qualcomm stock undervalued, or has the market reasonably adjusted the stock down to reflect reduced growth potential ahead?
Qualcomm’s Attractive Price Multiples
One of the first things that will likely stand out to investors looking at Qualcomm is its low P/E ratio of 14.3, which is well below the sector average of 23.6.
Similarly, Qualcomm trades at just 14.2x operating cash flow. The stock’s price-to-sales and price-to-book ratios are on the higher side at 3.8 and 5.9, respectively, but neither appears outrageous for a growing tech business in today’s market.
Analyst price forecasts also imply a decent amount of upside from QCOM. The average price target is $175.46, more than 18% higher than the last price of $148.19.
It’s also worth noting that the lowest price target for the stock is $140, implying that Qualcomm may have more upside than potential downside associated with it at the moment.
Qualcomm’s Fiscal Q3 Earnings
Qualcomm recently released its fiscal Q3 earnings report, the results of which were quite positive. Revenues increased by 10 percent year-over-year to $10.4 billion. Net income, meanwhile, spiked by 25 percent to $2.7 billion.
Earnings per share grew even more quickly, rising 29 percent to $2.43 for the quarter. The higher rate of per-share earnings growth is accounted for by Qualcomm’s ongoing share buyback program, which in Q3 alone deployed $2.8 billion to repurchase 19 million shares of QCOM stock.
Despite generally positive results, Qualcomm shares fell in after-hours trading after the report was released. In large part, this was due to a miss in phone-related revenue, which came in at $6.3 billion compared to an analyst consensus of $6.5 billion.
Qualcomm’s earnings also dropped at a time when markets were generally nervous about the pending imposition of new tariffs on August 1st, a fact that may have soured investor sentiment in spite of the generally positive results the business delivered.
It’s worth highlighting, though, that Qualcomm has shown very respectable profitability over the past year. Net margin has come in at 26.8 percent, while the return on invested capital has been 28.1 percent. This strong profitability could bode quite well for Qualcomm, especially if it can continue to raise its revenues in the years to come.
What Does Qualcomm’s Forward Growth Potential Look Like?
One of the issues Qualcomm is facing is a possible slowdown in its earnings growth. Over the coming 3-5 years, analysts only expect EPS to grow by about 5.8 percent annually. This estimate could, however, prove to be on the low side.
Qualcomm is increasingly looking to diversify and is planning to eventually generate at least half of its revenue from outside of its core smartphone chip market. This diversification, if successful, could help the business achieve a higher rate of earnings growth and keep closer pace with the broader market.
Among the growth drivers Qualcomm is currently eyeing is the emerging consumer market for smart glasses. The business has created a platform it calls Snapdragon AR1+, which makes it possible to run AI assistants completely on a pair of smart glasses, removing the need for a connected phone or other hardware. This capability could make Qualcomm an essential part of the currently small but growing market for augmented reality glasses.
Qualcomm also has strong opportunities in the automotive and IoT spaces, where it is already seeing significant growth. In the Q3 earnings report, for instance, Qualcomm detailed combined revenue growth from these two segments of 23 percent.
This handily outpaced the handset revenue growth rate of 7 percent, demonstrating the significant room for growth Qualcomm could have as it breaks into new markets.
On the downside, however, there’s a very real possibility that new US tariffs could hamper Qualcomm’s growth and reduce its margins.
When the Trump administration’s tariffs were first introduced in April, Qualcomm projected that they would impact demand for its smartphone chips and exert downward pressure on revenues. With tariffs on US trading partners now taking effect, that impact is likely to materialize, though it’s likely to be less severe than it would have been under the original tariff rates proposed in April.
Qualcomm’s Apple Problem
QCOM is also facing headwinds as Apple moves to reduce its dependency on Qualcomm chips. Apple is Qualcomm’s largest modem customer and is increasingly moving to use its own proprietary chips in place of Qualcomm’s. This will likely have a significant impact on future revenues and make it even more essential for Qualcomm to keep diversifying its revenue base.
So, Is Qualcomm Undervalued?
Qualcomm also remains solidly profitable, even though its forward earnings growth is projected to be on the slower side. In many ways, Qualcomm is still a fairly attractive business. It has delivered strong growth and is making very real progress toward diversifying away from being a pure-play on smartphone chips.
Another plus to Qualcomm at the moment is the fact that the business has made a habit of returning cash to shareholders through both share buybacks and dividends. In addition to its substantial repurchasing of its own shares, Qualcomm pays its shareholders $3.56 per share in dividends. This amounts to a yield of 2.4 percent at current prices.
However, the combination of an uncertain big picture environment, the fact that the business is still in something of a transitional phase of diversification and the impending loss of revenues from Apple all introduce considerable risks.
Taking these factors into account, it’s possible that Qualcomm’s current share prices are justifiably lower than they would be without these risk factors at play. At the moment, QCOM may be better to hold or watch than to actively buy until some of these uncertainties and their effects on the business become clearer.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.