We came across a bullish thesis on QUALCOMM Incorporated (QCOM) on Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on QCOM. QUALCOMM Incorporated (QCOM)’s share was trading at $156.93 as of Nov 26th. QCOM’s trailing and forward P/E were 17.55 and 13.97 respectively according to Yahoo Finance.
A macro view of a 5G/4G chips and modules, displaying the cutting edge technology of the company.
Qualcomm remains an intriguing investment opportunity within the semiconductor industry, particularly as its shares trade at a significant discount to their intrinsic value. Despite its leadership in wireless communication technologies and a history of innovation, Qualcomm has faced persistent market skepticism due to its reliance on Apple, exposure to the maturing smartphone market, and risks tied to its extensive revenue base in China. These factors have pressured the stock, reflected in a forward P/E of 14x, well below the industry median. However, Qualcomm’s strategic pivot towards high-growth sectors such as automotive, IoT, and AI-driven PC processors has set the stage for long-term success, offering a compelling case for revaluation.
Management has taken decisive steps to diversify revenue streams, reducing dependence on Apple and smartphones. The automotive segment exemplifies this shift, with revenue surging 68% year-over-year in the latest quarter, driven by increasing chip content in new vehicle models despite global auto industry challenges. Similarly, the IoT business is rebounding, with a 24% year-over-year revenue increase fueled by industrial demand and normalized inventories. These segments position Qualcomm to benefit from connectivity-driven secular trends, with double-digit CAGRs expected across its target markets through the decade.
Fiscal Q4 results highlighted Qualcomm’s resilience and growth. The company reported $10.2 billion in revenue, an 18% year-over-year increase, alongside significant margin improvements. Net income rose 33% to $3 billion, with EPS reaching $2.69 and record free cash flow of $11.2 billion for fiscal 2024. Shareholder returns remain robust, with $2.2 billion distributed via buybacks and dividends. A strong cash position of $13.3 billion, coupled with a 2.2% dividend yield supported by 20 years of growth, underscores Qualcomm’s financial stability and capacity for reinvestment.
However, challenges persist. Qualcomm derives 62% of its revenue from China and 15–20% from Apple, creating vulnerabilities. Apple’s ongoing development of in-house chips, though delayed until at least 2027, adds to the uncertainty. Yet, Qualcomm’s diversification into high-growth verticals mitigates these risks. Its leadership in automotive and IoT chipsets, combined with its nascent presence in AI-powered PC processors, underscores its potential to outpace conservative growth forecasts.
The market’s undervaluation seems disconnected from Qualcomm’s evolving narrative. Its long-term guidance for high-growth segments and strategic initiatives support its transformation into a diversified, innovation-driven enterprise. While risks from competition and market concentration remain, they are largely reflected in the current valuation. Qualcomm trades at a PEG ratio just above 1, highlighting an attractive risk-reward profile with significant upside potential.
Adding to the investment intrigue are recent developments such as Qualcomm’s licensing dispute with ARM and rumors of an Intel acquisition. The ARM dispute, centering on Nuvia’s architecture license, is likely to result in a negotiated settlement given the mutual dependencies involved, minimizing long-term impact. Meanwhile, Qualcomm’s rumored interest in Intel’s PC business appears strategically appealing but faces substantial regulatory and execution challenges. Qualcomm’s organic growth strategy in PC processors offers a more prudent path forward.
Guidance for Q1 FY25 reflects optimism, with revenue projected to grow 16% year-over-year at the midpoint, driven by robust demand across handsets, IoT, and automotive. Longer-term, Qualcomm’s diversification strategy is expected to drive high-single-digit revenue growth and low-double-digit EPS and cash flow growth through 2030. At current levels, the stock trades at an unjustified discount, offering investors an opportunity to capitalize on a de-risked growth story. A fair valuation could imply a target price of $231 by FY27, delivering a 14%-16% CAGR including dividends. Qualcomm’s strong fundamentals, strategic execution, and undervalued shares make it a compelling investment with multiple catalysts for growth.
QUALCOMM Incorporated (QCOM) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 74 hedge fund portfolios held QCOM at the end of the third quarter which was 100 in the previous quarter. While we acknowledge the risk and potential of QCOM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than QCOM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.