The Driving Force Behind Smart Cars

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The Inflation Reduction Act put the automotive industry front and center. 

While the headlines have focused on EVs, most investors are overlooking another catalyst. 

Today’s EVs look more like smartphones than they ever have before. And one company is poised to be the driving force behind them: Qualcomm (QCOM). 

It produces chips, or semiconductors, which are critical to many electronic devices.

Financial pros have been researching chipmaker stocks. And Qualcomm has been their third-most popular search in this category. 

The 5G smartphone leader is now making waves in the automotive space after creating the first 5G AI processor. 

Like most chipmaker stocks, QCOM shares have slumped in recent months.

But this microprocessor behemoth stands to benefit from longer-term trends.

Is it time to invest?

Qualcomm’s Business

Qualcomm is the world’s leading wireless technology innovator and 5G developer. Where Intel (INTC) and Advanced Micro Devices (AMD) focus on servers and computers, Qualcomm prefers to play in the mobile space.

Its 3G, 4G, and 5G technology is in every industry. The company’s tech has expanded into automotive, the IoT (Internet of Things), and computing. 

Most of the firm’s revenues come from selling communications systems known as CDMA systems. 

This includes integrated circuits, software, and systems for wireless voice and data transmission, wireless communications, and internet access systems. 

Qualcomm’s 5G AI processor is set to be a key driver in the automotive industry as companies there produce more “connected cars.”  Qualcomm’s expansion from smartphones into automotive is quite new and should create pockets of revenue growth for the company. 

Financials 

From 2015 to 2020, QCOM saw little revenue growth. 

That changed dramatically in the last two years. In 2021, the firm’s revenue grew 42% from the previous year on the back of its accelerated 5G rollout. 

This year, it’s on pace for even more revenue growth, with 12-month trailing sales at $42 billion. Plus, last quarter, the firm had record automotive and IoT revenues. 

QCOM holds $6.8 billion in total cash and $15.5 billion in total debt. It has an operating cash flow of $8.7 billion and pays out a $3-per-share annual dividend. It has plenty of capital to satisfy its short-term debt, with a current ratio of 1.6x. 

Valuation

QCOM trades at a 10.7x P/E GAAP ratio, which is well below its five-year average of 17.9x.

Moreover, it’s one of the cheaper semiconductor companies around. 

For example, AMD trades at a P/E GAAP ratio of 25.7x, Broadcom (AVGO) is at 19.8x, and Cirrus Logic (CRUS) is at 11.4x. Only IINTC’s is lower at 5.5x.

QCOM trades at a price-to-sales ratio of 3.2x, significantly lower than its five-year average. It’s also better than AVGO’s and AMD’s. However, it’s not as low as INTC’s at 1.4x or CRUS’ at 2x.

Profitability

QCOM has a gross profit margin of 57.9%, which is incredible for the sector. 

It’s far better than INTC’s, AMD’s, and CRUS’. But it’s not as strong as AVGO’s at 75.1%. 

When you look at QCOM’s net income margin of 30.5% and operating margin of 35.8%, it’s clear the firm knows how to run a business.

It has an EBITDA margin of 39.8%. Only AVGO’s is better at 57.3%. 

However, none of the other chipmakers are close to QCOM’s return on equity of 106%. The closest competitor is AVGO at 44.7%. 

The same is true with return on total capital. No competitor can touch QCOM at 33.9%. 

Growth

After years of struggling to show revenue growth, QCOM has stepped on the pedal for the last two years. Its year-over-year revenue growth of 29% beats INTC’s and AVGO’s. However, it’s not as strong as AMD’s at 61.7%. 

Only AMD’s 95.9% EBITDA growth beats out QCOM’s 41.9%. 

Our Opinion 8/10

QCOM is a dominant player in smartphone technology and now has found new light in the automotive sector. 

Shares of the stock are cheaper than AMD and chipmaker Nvidia (NVDA) on a price-to-earnings basis, and unlike those other two, it pays investors a dividend. 

Although the chip sector is on a major decline, we like QCOM here and believe it will be a strong stock over the coming years.