Qualcomm: Value, Growth and Yield

07/13/2016 8:00 am EST

Focus: STOCKS

Chris Quigley

Contributing Editor, The Prudent Speculator

Valuation is the initial starting and/or stopping point for all of our investment considerations, asserts Jason Clark of The Prudent Speculator. Here’s his latest stock pick, co-authored with Chris Quigley, who specializes in fundamental research and analysis.

Qualcomm (QCOM) holds a large number of wireless-related patents, and is a key contributor to the development of CDMA, a communications technology that is heavily used around the world.

Concerns over competition -- particularly in its licensing business in major growth region, China -- and losses in its baseband chip business with Apple (AAPL) have led investors to shy away from its undervalued shares.  

We don’t take any of those risks lightly, but we believe QCOM is far from dead money. Nevertheless, we believe make QCOM shares a good technology addition to diversified long-term focused investment portfolios.

Qualcomm continues to vigorously defend its lucrative licensing and intellectual property (IP) revenue streams, particularly in China where IP is not seemingly widely respected.

We believe that licensing opportunities in China remain attractive long-term catalysts for growth, despite the challenges with regulators and IP protection.

Although Qualcomm's bread and butter has long been mobile communications technologies, the company is working to diversify and de-risk its revenue stream and its growth prospects via mergers and acquisitions.

Cars are a relatively new frontier for Qualcomm, propelled mainly by the seemingly insatiable demand of consumers to remain connected.

Automakers across the price spectrum -- from Hyundai to Porsche -- are using variations of the Snapdragon module to power dashboards, onboard infotainment systems and LTE connectivity.

The Internet of Things is not a new segment for Qualcomm, but perhaps is the largest potential source of global volume growth.

By partnering with a broad variety of customers in practically every business segment imaginable, Qualcomm is positioning itself to be a one-stop-shop for integrated chips.

QCOM is currently trading with a forward earnings multiple of slightly more than 12; this multiple is below the firm’s one-, three- and five-year historical averages and is below the corresponding average multiples of its industry peer group.

Additionally, we like that Qualcomm generates solid free cash flow which can be used to continue to invest in the future, buy back shares and support management’s dedication to its dividend policy (the payout has increased every year since 2003).

While competitive pressures and other noted operating headwinds will linger, we continue to like QCOM’s overall long-term prospects, a dividend yield of 4.0%, attractive valuation metrics and strong balance sheet.

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By Jason Clark and Chris Quigley of The Prudent Speculator

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