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First published on Simply Wall St News
QUALCOMM Incorporated (NASDAQ:QCOM) has been quite the over-performer, with a return of 23% in the last 12 months and a risk adjusted return of 11.2%. It seems that the shifting of the wireless industry created a wave of demand for the company, resulting in high growth. In this article, we will explore the changes in performance and see if the rise in price is justified on a fundamental basis.
Value Adding Growth
Qualcomm has some impressive growth fundamentals. The long term CAGR for the company is 8.7% over the last 5 years. However, Qualcomm really kicked it off during 2021 when the company grew by 35%, which is more than the 3-year average growth rate of 15.7%.
The company has also stabilized operating margins to 2020 levels at 30.9%, while managing to increase net profit margins to 27.7% (a nice 10% growth from last year).
View our latest analysis for QUALCOMM
The growth seems to be high quality, but in order to see if it creates value for shareholders, we need to compare it to the returns and costs of capital.
Looking at the returns on capital employed and the returns on equity, it is no surprise that investors love the stock. Qualcomm has a ROCE of 36.4% and ROE of 88%. This means that the company is a huge excess value creator relative to their cost of capital and equity at 7.85% and 6.93% respectively.
Strong fundamentals are reflected in value, which is why it is great to see that the stock is potentially undervalued on a DCF model basis. According to our model (based on some assumptions and estimates), the stock is some 27% undervalued, with an intrinsic value of US$236 per share. Note that this is a rough model, and many analysts will have diverging views on the value of the company!
In order to see how the future might look for the company, we paired past income with analyst estimates in the chart below.
Future Estimates
Looking ahead, the most recent consensus for QUALCOMM from 26 analysts is for revenues of US$42.4b in 2022 which, if met, would be a notable 18% increase on its sales. While per-share earnings are also expected to ascend 18% to US$10.48.
With a profit of US$9.99b and a market capitalization of US$193.8b we can see that, even with the November 2021 price jump, Qualcomm is trading at a Price to Earnings ratio of 19.4x, somewhat below the industry average of 24.4x. Usually, a stock price spike like the one in November can frighten investors of a return to average levels, but our relative valuation shows that the stock is justifiably up based on current and growing profits.