Company Description
Qualcomm is a semiconductor company which produces
wireless communication chips for mobile devices. It
belongs to the information technology sector and the
telecommunications equipment subsector of S&P 500.
The company has two major segments; one active in
designing and developing of new devices and the other
licensing of the developed products. Thus, more than 77%
of the firm’s revenue is from loyalties of the licensed
patents. Unlike many other semiconductor companies,
such as Intel, Qualcomm does not have production
facilities, so called fabs, and therefore is dependent on the
third parties for manufacturing of its developed devices.
Investment Thesis
Based upon my macroeconomic analysis, IT sector has a
promising short term and mid-term performance in the
stock market. Qualcomm has had a healthy revenue
growth of 30% to 40% which is anticipated to be 5-10% in
the next two years. The company has consistently
maintained its dominance in the market. My evaluation
reveals a total return of above 9% by owning the stock.
Qualcomm’s stock is also undervalued compared with the
sector and S&P 500 index. Therefore, I recommend BUY
for this stock.
Recommendation Risks
Although my recommendation is BUY for this stock, I also
foresee risks associated with the company’s future
earnings and therefore its stock performance. Legal
challenges remain a major source of concern for the
company. In January 2015, the firm paid close to $1Bn
fine to the Chinese government for business irregularities.
There are, however, other legal suits in China, South
Korea and Europe that the company may face in near
future. In addition, since the firm has no production
facility, it is mainly dependent on the revenues generated
by its R&D activities. A significant portion of the revenue
is sourced to 2-3 customers. Any changes in the
competitive landscape affecting the customers will
significantly hamper revenue generation for the firm.
Analyst: Mehdi Mirsaneh, Mirsaneh.1@osu.edu
Recommendation:
Buy
Qualcomm Inc.
Date: 4 April 2015
Current Price: $67.97
Target Price: $72.37
Total Return: 9.29%
Ticker: QCOM
Market Cap.: $112.12Bn
Dividend Yield: 2.82%
Shares Outstanding: 1.65Bn
52-Week Price Range: $81.60$62.46
Trailing P/E= 14.36
Forward P/E= 12.52
P/Book= 2.96
P/Sales= 4.25
ONE YEAR PRICE
4 April 2015
Table of Contents
COMPANY OVERVIEW .......................................................................................................................3
Business Segments ........................................................................................................................3
Competitive Landscape and Current Challenges ..........................................................................4
Qualcomm’s Sustained Competitive Advantage .......................................................................... 5
Recent Important News and Events ............................................................................................. 5
INVESTMENT THESES.......................................................................................................................6
Economic Analysis ........................................................................................................................6
Key Industrial Drivers................................................................................................................... 7
Financial Analysis and DCF Model ...............................................................................................8
Valuation Analysis .......................................................................................................................11
RISKS ................................................................................................................................................. 14
SUMMARY AND CONCLUDING REMARKS ................................................................................... 15
BIBLIOGRAPHY ................................................................................................................................ 16
APPENDIX 1: INCOME STATEMENT FORECAST- PART 1 ............................................................ 17
APPENDIX 2: INCOME STATEMENT FORECAST-PART 2 ............................................................ 18
APPENDIX 3: DCF MODEL .............................................................................................................. 19
APPENDIX 4: SENSITIVITY ANALYSIS OF VALUATION ............................................................. 20
Mehdi Mirsaneh
Qualcomm is a fabless firm; that is, it has no
COMPANY OVERVIEW
fabrication plants. Thus, the main activity of
Qualcomm is a semiconductor firm active in
the design and development of chip-based
devices for wireless applications. Formed in
1985 by seven industry veterans, Qualcomm
Communications landed its first contract in the
same year with the US army to work on secure
communications.
In
1988,
Qualcomm
launched a satellite tracking system to track
truck fleets for transportation industry. In the
following years, Qualcomm established itself in
the
wireless
third parties that own fabrication plants. This
business model has some advantages and
disadvantages which will be addressed in the
following sections.
Business Segments
Qualcomm business is mainly composed of two
major units:
1- Qualcomm CDMA Technologies (QCT),
systems
which owns the R&D, products and services
which use a single channel for wireless
including the semiconductor services, and
communications, creating a path for the
covers all product development activities.
new
systems
new designs, followed by licensing them to
by
developing
communication
Qualcomm is the research and development of
multi-transmitter
application of GPS technology for commercial
use. In 1991, Qualcomm became a public
2- Qualcomm Licensing business (QTL), which
company by conducting its IPO on NASDAQ.
owns the majority of the company’s patent
During the past 24 years, Qualcomm’s main
portfolio, and covers all licensing activities of
business activity had been in the research and
the company.
for wireless communications. Its designs have
been
employed
communication
by
the
device
main
wireless
manufacturers,
including Samsung and Apple to incorporate
variety
of
communication
technologies,
including GPS, Voice, WiFi, Bluetooth etc., in
smart phones. In simple terms, Qualcomm’s
designs are applied using semiconductor
manufacturing processes in fabrication plants
(also called fabs or foundries). However,
QCT is the backbone of the business. In fact,
the income from QTL does not materialize
without the products developed at the QCT
business. QTL licenses the technologies which
are developed by the QCT. QCT also directly
involves in production and sales in cooperation
with partners (as explained in the previous
section) and has a larger value of sales
compared
with
QTL,
see
below
graphs.
However, the largest earning is attributed to
COMPANY OVERVIEW
development of variety chipset designs, chiefly
3
Mehdi Mirsaneh
the QTL, since the segment’s activities are only
licensing which incur almost no costs.
Sales
Comp Annual
Growth Rate
Earnings
Landscape
and
Current
However, there are challenges facing the firms
The huge increase in the usage of mobile
devices including cell phones and tablets has
been
the
main
driver
of
growth
for
semiconductor industry. As shown in the below
graphs, in 2012, mobile devices accounted for
62% of the total semiconductor market. While
the total market for semiconductor industry is
expected
to
grow
to
$380Bn,
wireless
communication applications are anticipated to
have the largest growth (~11%), accounting for
32% of the market (~$120Bn) [1].
within the industry including Qualcomm. The
foundries, or fabs, are extremely expensive
(around $4Bn) to build and have high fixed
costs. Therefore, only firms with a huge market
can set up and run the facilities. Alternatively,
there are firms which only manufacture
(mainly located in Taiwan and China) devices,
licensing designs from fabless firms such as
Qualcomm. Intel, the giant semiconductor
manufacturer, and Samsung are the rare firms
which are vertically integrated into design and
have
foundries.
The
consolidation
of
COMPANY OVERVIEW
Competitive
Challenges
4
Mehdi Mirsaneh
manufacturing within few fab-based firms and
band, also described as 3G/4G technologies).
the mobile device customers in mainly two
Qualcomm currently collects $7 loyalty fee
firms (Apple and Samsung) have created
from each smart phone sold globally and this
limited maneuver space for fabless firms.
will soon grow dramatically. Presently, only
Therefore, companies such as Qualcomm are
20% of all cell phones sold globally are smart
facing the challenge of competition to sell
phones (work on 3G/$G technologies). This
designs to Apple and Samsung and at the same
figure is expected to grow fast within the next
time encountering little bargaining power over
few years, creating almost one way profit
foundries,
generating path for Qualcomm. In addition,
their
profit
margin
significantly. Moreover, R&D activities are
Qualcomm
generally associated with high initial costs. The
advantage to form a monopoly in the market as
risk for a firm like Qualcomm, therefore, is that
its all other designs are integrated into the
the developed designs fail to grasp the
original platform which is covered by its
attention of the big players/customers (Apple
intellectual property, making the customers
and Samsung) in the field, resulting in a huge
dependent on Qualcomm wireless devices.
sunk cost for the company. Moreover, the
Therefore, it appears that a mixture of
company
government
intellectual property and design integration
investigation which could cost the enterprise
along with huge investment in R&D are
billions of dollars. This challenge will be
Qualcomm’s competitive advantages which are
addressed in more detail in the “Recent
anticipated to be sustainable for years to come.
is
facing
antitrust
Important News and Events” section.
Qualcomm’s
Sustained
Advantage [2]
Competitive
intelligently
has
used
this
Recent Important News and Events
The most important news has been settling the
Chines antitrust government investigation in
As previously mentioned, there are challenges
the early days of January 2015. Qualcomm was
facing a fabless firm like Qualcomm, but it is
under investigation for the market monopoly
vital to note that Qualcomm has some
in China as a result of competitors’ protest.
competitive advantages which seem to sustain
Following
for foreseeable future. Qualcomm’s main
Qualcomm eventually settled the dispute by
advantage is its vast portfolio of intellectual
paying close to $1Bn fine to the Chinese
property which covers
the multi-channel
government. Although this was positive news,
communications (transmitting variety of data
it appeared that the antitrust woes are far from
including voice, video and text over the same
over, as the South Korean government also
few
months
of
investigation,
COMPANY OVERVIEW
reducing
5
Mehdi Mirsaneh
announced that it was looking in a similar
positive performance, as expected. Thus, I
pattern of activities in Korea. This was in
expect that the IT sector will have a promising
addition to other news that the US and
near term stock performance.
European governments had also initiated
similar investigations [3]. Although, none of
the other investigations have shown any sign of
misconduct, the presence of such negative
news around the firm affects the performance
of Qualcomm stocks in the market.
INVESTMENT THESES
Economic Analysis
The technology sector has a cyclical pattern
which closely follows the overall economic
trend of the country. Since many companies in
the IT sector manufacture consumer products,
it is possible to predict the earning trend in the
sector by evaluating the consumer spending
pattern. Figure below [4] reveals the personal
savings
and
household
net
worth
simultaneously, revealing that the personal
savings increases (or spending decreases) when
the household net worth increases. There are
Following
the
2008
financial
crisis,
we
observed government interference to limit the
crisis using different
strategies
including
decreasing the interest rate to almost zero%.
However, it is expected that the Fed will soon
increase interest rates. Table below [5] shows
the expected effect of interest rise on different
sectors, indicating that the technology sector is
predicted
to
have
the
highest
positive
performance as a result of the interest rate rise.
including employment, household expectation
of future income growth, housing prices etc.
Looking at the net worth trend and the
aforementioned parameters which are affecting
it, I anticipate that the consumer spending
increases within the next 12 to 18 months. As
the sector’s earning grows, the stock will have a
INVESTMENT THESES
many factors affecting household net worth,
6
Mehdi Mirsaneh
Since
Qualcomm
is
a
member
of
the
portable devices and their production and sales
Communications Equipment subsector of the
would be the main driver for the Qualcomm’s
IT sector, it is also important to assess the
revenues. Below graphs show various smart
performance of this subsector against the IT
device usage forecast till 2016 for different
sector and the S&P 500, below figure. It is
applications
evident that the subsector’s performance has
significant growth, especially in smart phones
been consistently underperformed the sector,
and in Asia-Pacific [6]. Therefore, it is
indicating that the performance gap between
anticipated
the sector and subsector may increase in near
Qualcomm’s CDMA based platform products
future (sign of further underperformance).
which
and
a
regions,
indicating
steady market
support
data
growth
–voice
a
for
-video
communications used in the aforementioned
devices.
Key Industrial Drivers
As
explained
above,
one
of
the
major
applications of Qualcomm’s products is in
multi-channel communication of voice and
data simultaneously, in particular in portable
3G/4G
devices such as smart phones, Tablets etc.
Third and fourth generation (3G & 4G) cell
Thus, it is apparent that the usage of smart
phones have been a key driver of the growth in
INVESTMENT THESES
Smart Phone Usage
7
Mehdi Mirsaneh
the usage of smart phones. As of 2014, there
have been 2.8Bn devices based on these
technologies which are expected to grow to 5Bn
Other Players
by 2018. Presently, the CDMA design is the
Another key driver for Qualcomm’s revenue is
superior product in the market and has the
the fact that whether its products remain the
largest market share. Therefore, providing
customers’ choice of design in future. Recently,
CDMA remains the best choice in the market,
Intel has started to develop similar products
Qualcomm’s revenue is expected to grow.
which
could
significantly
challenge
Qualcomm’s sales in future. Samsung, itself a
Internet of Things
device designer, may introduce new products
The Internet of Things is a concept in which
which can outclass Qualcomm designs, leading
different smart devices are connected with
to the loss of product dominance by company.
market
for
wireless
connecting
devices.
Financial Analysis and DCF Model
Qualcomm’s designs and products have put the
Revenues
firm in a strategic position to take advantage of
As shown in Appendix 1 also in below table, my
this huge market which is expected to reach
revenue projection is in line with the analysts’
~$41Bn by 2020 [7], see below graph. It
consensus. Looking at the historical revenues
appears that Qualcomm has already taken the
below graph, apart from 2011 to 2013 when
steps to dominate this market by developing
there was a large increase in the growth rate
new
(likely due to the after-recession effect), the
wireless
communication
healthcare and auto industry [8].
devices
for
growth had been between 5-6%. Therefore, I
chose a 5.5% growth rate and decreased it to
4~% to highlight the fact that the growth will
most likely approaches to the nominal GDP
growth of 4% in coming years. While the
growth between 2011 and 2013 was 30% - 40%,
it is vital to note that it is unlikely that the firm
could realize such a large revenue growth
within the next few years.
INVESTMENT THESES
each other through internet, creating a new
8
Mehdi Mirsaneh
the positive impact of the legal resolution in
China on the revenue growth of this segment
Revenue
needs to be seen. The fact that the growth in
revenue in the QTL segment has been flat is
alarming, since this segment contributes a
much larger profit margin to the firm’s income.
According to the firm fillings [9], China, South
Korea and China comprised 50%, 23% and 11%
of revenue generations, respectively, majority
of which through loyalties of licensed designs.
Revenue
My Projection
Analysts’
Consensus
2015
$27,948m
$27,194m
2016
$29,503m
$28,476m
Although,
Chinese
market
growth
seems
promising, Qualcomm’s legal challenges in the
country may hamper its future growth; see the
risk section.
As noted in the SEC fillings of the firm [9],
Gross Profit
there are two main segments which are the
Below figure shows my projection of gross
services and licensing. Equipment and services
is the larger source and expected to growth at a
larger pace compared with the licensing
section. In 2014, equipment and services
revenues, which were mostly related to sales of
MSM
and
accompanying
RF
and
PM
integrated circuits, were $18.43Bn, forming
profit
against
the
analysts’
consensus,
highlighting that my gross profit projection for
2015 and 2016 was slightly higher than the
analysts’.
Gross Profit
My Projection
Analysts’
Consensus
2015
$17,607m
$15,950m
2016
$19,177m
$17,061m
almost 99% of QCT segment revenue. The QTL
section, however, generated only $7.6Bn in
2014 and was mainly flat. The firm attributed
the low growth rate in this segment to the
under-reported royalty fees from licensees, in
particular in China where the huge legal battle
has undermined the firm operation. Indeed,
Although
the
main
reason
behind
this
difference will be revealed when the relevant
costs are discussed, I would like to mention
one key point here. As stated above my revenue
projection was closely following the analysts’,
INVESTMENT THESES
source of revenue generation; i.e. equipment-
9
Mehdi Mirsaneh
and therefore, the main reason behind the
anticipate that the cost of equipment and
difference should be associated with the costs
services remain flat, in contrast with the
projection. This could be, alternatively, seen in
consensus projection of growth for these costs,
the gross profit margin as shown in the below
below table.
table, revealing a higher estimation of profit
analysts’.
Cost of Eq. &
Services
My Projection
Analysts’
Consensus
2015
$10,341m
$11,243m
2016
$10,326m
$11,415m
Gross Profit Margin
My Projection
Analysts’
Consensus
2015
63.0%
58.7%
Research and Development
2016
65.0%
59.9%
Rapid technological changes in the wireless
As discussed previously, QTL segment has
higher profit margin and one may logically
contribute
the
differences
to
the
QTL’s
projection. However, since the QTL has a
negligible cost, as it is only a licensing unit, I
believe the main differentiating source is the
projection of the QCT’s revenue.
Cost of Equipment and Services
The majority of the cost of equipment and
services is associated with the QCT business
unit, as the QTL has no significant costs, as
described before, due to its business activity
which is merely licensing of designs. According
to the SEC filing of the firm in 2014 [9], the
cost of equipment and services also includes
the cost of shipping and handling. Due to the
communication
industry
demands
huge
investment in the research and development
for firms which intend to remain competitive
within the sector. Looking at the financial
statement of the firm, Qualcomm has increased
its investment in R&D significantly, ~83%
increase from 2011, signaling that it has
prepared itself for the fierce competition in
future. Thus, I predict that this investment will
result in higher revenues in the next 3 to 5
years. Increased investment in R&D helps
Qualcomm maintain its leadership position in
its flagship designs in the LTE baseband
market which the firm currently holds ~95% of
market share [7].
Selling, General and Administrative
(SG&A) Costs
economic downturn in the rest of world and
As revealed in the income statement of the
low energy costs as well as labor costs, I
company, SG&A is the third largest cost,
INVESTMENT THESES
margins in my projection, in contrast to the
10
Mehdi Mirsaneh
forming ~12% of the total costs. According to
risk has been almost eliminated by the new
the firm’s SEC filing, SG&A includes legal costs
legal settlement agreement which occurred at
(~2.6%), share-based compensation (2.3%)
the end of January 2015. On March 9 2015,
and marketing and employee compensation
Qualcomm announced that it will repurchase
costs. During 2014, firm has encountered
$10Bn of its stock and increase dividend by
higher employee and marketing expenses,
about 14% in the next 12 months [12].
leading to higher SG&A costs. The $56m
Improving the EPS (by reducing the number of
increase in marketing expenses seems to be in
shares
line with the firm’s attempt to maintain its
dividend will positively affect the firms stock
market share, a positive move which should
price in near future.
translate into higher revenues in future.
Earnings Per Share (EPS)
outstanding)
and
increasing
the
Valuation Analysis
Valuation Based on Multiples
Based on my evaluation, I expect that the
firm’s EPS to grow at 7-9% annually in the next
two years, reaching $5.31. This is consistent
with some analysts’ forecast which indicated an
EPS of $5.44 in 2016 [10], below table.
So far the valuation analysis was based on the
DCF model which aims to look at the intrinsic
value of stocks compared to the current market
price. In this section, I will look at Qualcomm’s
current market price and compare it with the
index (S&P 500), the information technology
Earnings Per
Share
My Projection
Analysts’
Consensus
2015
$4.96
$5.02
2016
$5.31
$5.44
sector and the competitors to assess how the
firm’s
stock
performing
in
the
market.
Although, this assessment provides us with
useful information, the DCF is indeed the best
However, some other analysts had a slightly
different projection, in particular for 2015 [11].
Qualcomm vs S&P 500
They forecast EPS of $3.5 to $4.75 for 2015,
Below graph reveals the Qualcomm’s share
which is smaller than my and Bloomberg
price in the past 12 months, compared with
analysts’ expectations. This could be due to a
S&P 500 index, showing that the firm’s stock
different projection of revenues for the coming
has performed negatively compared with the
year, attributed to difficulties and risks in
market.
China. However, as explained previously, this
Qualcomm’s P/E, P/B, P/S and P/EBITDA
The
following
table
compares
INVESTMENT THESES
way to identify undervaluation.
11
Mehdi Mirsaneh
relative to S&P 500, in the past 12 months. The
current P/E ratio is 0.79, indicating that it is
relatively smaller than the S&P 500. During the
QCOM vs
S&P 500
High
Low
Median
Current
P/E
1.19
0.61
0.90
0.79
P/B
1.77
1.04
1.21
1.04
P/S
5.41
3.21
3.28
3.21
past 12 months, however, P/E ratio of
Qualcomm compared with S&P 500 was
ranging from 0.61 to 1.19 with a median of
0.90. Thus, the data reveals that the current
P/E ratio of Qualcomm is lower than the
median within the past year. The P/B ratio,
relative to S&P 500, is indeed the lowest within
compared with S&P 500 is now the lowest
Qualcomm vs Information Technology
Sector
within the past 12 months.
In comparison to the IT sector, Qualcomm’s
the past 12 months. Similarly, P/S ratio
P/E ratio is lower than 1 and is lower than the
median during the past 12 months, see below
S&P 500
table. Similarly, the P/B ratio vs the sector is
now the lowest within the last year. In contrast,
P/S seems to be relatively always higher than
one, although this ratio was the lowest
compared to the sector within the last 12
Qualcomm
months. Therefore, in summary, it appears that
Qualcomm’s stock ratios vs the sector is either
at the lowest or close to lowest, indicating that
Looking merely at these ratios and market
Qualcomm’s stock is undervalued.
me that Qualcomm’s shares are currently
QCOM vs IT
Sector
High
Low
Median
Current
P/E
1.27
0.50
0.77
0.73
P/B
1.10
0.69
0.80
0.69
P/S
3.76
1.34
1.89
1.34
undervalued. However, it is key to note that the
more
important
comparison
is
between
Qualcomm and the sector and peers, the
upcoming sections, which will reveal more
accurately how the stock has been performing.
INVESTMENT THESES
share price compared to S&P 500, it appears to
12
Mehdi Mirsaneh
Qualcomm vs Peers
lower than Qualcomm’s. P/CF seems to follow
Relatively to its peers, Qualcomm’s ratios are
shown in the below table. The peers have been
the same story line, as the average (15.17) is
lower than Qualcomm’s (15.95).
chosen based on the products and the market
In summary, it seems to me that, apart from
and how close is their business to Qualcomm.
the P/E ratio, Qualcomm’s other ratios are
These
higher
firms
are
either
manufacturing
than
the
peers,
indicating
that
competing products or are semiconductor
Qualcomm’s stock price is overvalued in the
firms that do not possess foundry (they are
market relative to its peers.
fabless), similar to Qualcomm.
Multiples Evaluation Price Target
P/E
P/B
P/S
P/CF
Qualcomm
15.73
3.09
4.60
15.95
Broadcom
Corp.
31.0
2.98
2.9
17.40
Texas
Instrument
20.6
4.54
5.6
17.11
Intel Corp.
15.58
3.06
3
16.37
Marvell
Technology
17.41
2.11
----
12.70
NVIDIA Corp
19.55
2.45
2.7
16.37
Maxim
Integrated
27.42
3.92
4.3
15.12
Micron
Technology
9.58
1.98
2.8
11.14
Based on my assessment of Qualcomm’s
multiples versus the comparable firms, sector
and market, I identified my target multiples
each of which lead to different target prices. As
shown in the below table, the average of the
target prices is 14.9% higher than the current
market price for Qualcomm’s stock, indicating
that overall Qualcomm’s stock is presently
undervalued, a similar conclusion to DCF
valuation model.
Abs
Valuation
Current
My
Target
Multiple
Target
/Current
P/E
15.73
20
1.27
$4.5
$90
P/B
3.09
3.5
1.13
N/A
$81.6
Apart from Micron Technology which has a
P/S
4.6
4
0.87
N/A
$62.8
P/E ratio of 9.58, Qualcomm’s P/E ratio is
P/EBITDA
13.83
15
1.09
N/A
$78.7
almost the lowest compared to peers. The P/B
Average
seems
to
be
slightly
different
as
Qualcomm’s ratio is slightly higher than the
average of peers’ P/B ratios (3.00). The
average P/S ratio of peers is 3.55, which is
Upside/ Downside Potential Over Current Stock Price
($67.97)
Target
Price
$78.1
14.90%
INVESTMENT THESES
ratio
Exp.
EPS
13
Mehdi Mirsaneh
RISKS
3G/4G technologies in the developing markets.
Owning Qualcomm’s stocks similar to any
other stock is associated with risks. The risks
which are affecting the firm’s revenue would
affect its stock price too. It is therefore
to
evaluate
the
risks
that
Qualcomm’s facing and how these risks could
impact its revenues in the coming years.
has
limited
number
of
very
OFDMA. The company’s revenue is therefore
dependent on the fact that these designs are
deployed by the customers and that the
customers develop other devices based on
these designs. The CDMA design accounts for
around 45% of Qualcomm’s revenue [13].
However, the firm has consistently lost the
market share to the competitors in the past ten
years. The market share which was once
around 81% reduced to ~60% in 2010 and
reduced further in the following years.
A main risk for Qualcomm is that the wireless
carriers and/or customers use other competing
technologies in future, instead. This will most
likely completely wipe out a major source of
for
the
firm
with
on governments’ regulations. However, it is
known that governments’ actions are generally
associated with unpredictable delays, making
future
employment
of
Qualcomm’s
Limited Number of Customers
successful products including CDMA and
revenue
expansion in the 3G/4G networks is dependent
technologies even less certain.
Narrow Range of Products
Qualcomm
affect Qualcomm’s future cash flows. The
disastrous
consequences.
Moreover, the future cash flow projection of
Qualcomm depends on the future adaptation of
Qualcomm’s customers are mainly major
portable
wireless
device
manufacturers
including Samsung and Apple. Samsung alone
accounts for ~20% of Qualcomm’s revenue.
However, Samsung itself is a designer and
manufacturer of wireless devices which may, at
any point, decide to develop its own products,
instead of paying royalties to Qualcomm.
Recently, January 2015, Samsung announced
that
it
may
not
deploy
Qualcomm’s
Snapdragon 810 product in its Galaxy S6 smart
phones due to some technical issues.
During the company’s quarterly earnings
report on 28 Jan 2015, Qualcomm’s CEO, Steve
Mallengkopf, stated that “we now expect that
our Snapdragon 810 processor will not be in
the upcoming design cycle of a large customer’s
flagship device, impacting our outlook for both
volume and content in that device”. Qualcomm
owns around 94% of market share in LTE
RISKS
important
Any delay in this trend could also significantly
14
Mehdi Mirsaneh
devices via its flagship product series of
Chinese firm sued Qualcomm for trademark
Snapdragon.
infringes, asking for $100Bn of compensation.
Moreover, Intel, another Qualcomm’s major
Following the antitrust settlement in China,
customer and competitor may develop devices
South
and designs which outclass the firm’s products,
announced
making them instantly obsolete. In fact, it was
investigation into Qualcomm’s activities in
announced that Intel would partially replace its
their countries. If it is found guilty by the EU,
design in Apple’s IPhone products in 2016 [14].
Qualcomm may be fined up to 10% of its global
The release of this single information on 11
revenues.
Korean
that
and
EU
they
authorities
had
also
initiated
an
March 2015 by an unknown source resulted in
2.25% drop in Qualcomm’s market share price,
while Intel gained around 2%.
Legal Challenges
SUMMARY AND CONCLUDING
REMARKS
Based on my analysis which is reviewed in this
Recently Qualcomm was engaged in a legal
document, I believe that the IT sector will have
battle in China due to an investigation by the
an above average performance in the stock
Chinese government’s antitrust agencies which
market in near future. In particular, the return
found illegal activities by Qualcomm. China is
of the sector will be higher if there is interest
almost the largest market for the firm. Even
rate
the announcement of the investigation affected
Communications Equipment sub-sector might
Qualcomm’s earning as some of the firm’s
have a weaker performance than the average of
clients stopped paying their royalties for the
the
licensed
a negative legal
Qualcomm’s stock is slightly undervalued,
outcome could affect the firm’s future cash
according to the DCF model (6.48%) and
flows significantly. However, the good news
multiples
valuation
was that Qualcomm could settle the dispute in
however,
risks
January 2015 by paying ~1Bn fine to the
recommendation. The firm’s future revenue
Chinese government as well as agreeing a
growth is highly dependent on many factors
change in its business model in the country.
which are not under the control of the
However, it appears that the legal issues in
company. These include but not limited to the
China are far from over. In March 2015, a
narrow customer base, legal and antitrust
Thus,
by
sector.
My
the
Fed.
However,
assessment
(14.9%).
associated
reveals
There
with
the
that
are,
stock
issues in Asia and Europe, low profit margin
SUMMARY AND CONCLUDING REMARKS
designs.
rise
15
and the competitive nature of the industry.
However I believe the return outweighs the
risks, and therefore, I recommend BUY for
[7]
Qualcomm’s stock.
Stock: Qualcomm Inc.
Ticker: QCOM
Current Price: $67.97
Target Price: $72.37
[8]
[9]
Recommendation: buy
Analyst: Mehdi Mirsaneh
[10]
[11]
BIBLIOGRAPHY
[1] McKinsey&Company, "McKinsey on
Semiconductors," McKinsey Practice
Publications, 2013.
[2] V. Katsenelson, "Qualcomm's Competitive
Advantage Are Too Numerous to Ignore,"
Institutional Investor, 25 11 2013.
[Online]. Available:
http://www.institutionalinvestor.com/blo
garticle/3282549/blog/qualcommscompetitive-advantages-are-toonumerous-to-ignore.html#.VSLAJ_nF-h1.
[Accessed 2015 04 04].
[3] C. Neiger, "Qualcomm's Antitrust Woes
Are Far From Over," 19 02 2015. [Online].
Available:
http://www.fool.com/investing/general/2
015/02/19/qualcomms-antitrust-woesare-far-from-over-but-inv.aspx. [Accessed
04 04 2015].
[4] D. Roberts, Economic Outlook, 2015.
[5] N. Bohnsack, Quantitative Research &
Global Asset Allocation, 2015.
[6] "The Blog," 04 06 2012. [Online].
[12]
[13]
[14]
Available:
http://zeendo.com/info/mobile-growthforecast/. [Accessed 04 04 2015].
P. Sikka, "Market Realist," 19 11 2014.
[Online]. Available:
http://marketrealist.com/2014/11/qualco
mm-plans-tap-internet-things-marketgrowth/. [Accessed 04 04 2015].
Compnay Website, "Qualcomm," [Online].
Available: https://www.qualcomm.com/.
[Accessed 04 04 2015].
SEC 2014 Filings, "SEC," 2014. [Online].
Available:
http://www.sec.gov/Archives/edgar/data
/804328/000123445214000320/qcom10
-k2014.htm. [Accessed 04 04 2015].
Bloomberg, [Online]. [Accessed 2015].
4-traders, "Qualcomm," [Online].
Available: http://www.4traders.com/QUALCOMM-INC4897/?type_recherche=rapide&mots=qco
m. [Accessed 04 04 2015].
L. Gensler, "Qualcomm Plans $15B Stock
Buyback, Hikes Dividend," Forbes, 09 03
2015. [Online]. Available:
http://www.forbes.com/sites/laurengensl
er/2015/03/09/qualcomm-plans-15bstock-buyback-hikes-dividend/. [Accessed
04 04 2015].
Forbes Magazine, "Qualcomm Cruises To
$53 If It Slows Bleeding In CDMA Market
Share," Forbes, 20 10 2010. [Online].
Available:
http://www.forbes.com/sites/greatspecul
ations/2010/10/20/qualcomm-cruisesto-53-if-it-slows-bleeding-in-cdmamarket-share/. [Accessed 04 04 2015].
M. Perrault, "Intel, Not Qualcomm,
Modem Chips For iPhones: Report,"
Investor.com, 11 03 2015. [Online].
Available:
http://news.investors.com/technology/03
1115-743065-intel-modem-chipsreportedly-might-go-into-iphones.htm.
[Accessed 04 04 2015].
BIBLIOGRAPHY
Mehdi Mirsaneh
16
Mehdi Mirsaneh
APPENDIX 1: INCOME STATEMENT FORECAST- PART 1
Consensus- Revenue
Revenues:
Equipment and Services
Licensing
Total Revenue
Costs and expenses:
Cost of equimpent and services revenues
Research and development
Selling, general and adminstrative
Other
Total costs and expenses
Operating income
Investment income, net
Income from continuing operations before income tax
Income tax expense
Income from continuing operations
Discontinued operations, net of income taxes
Net income
Net loss attributable to noncontrolling interests
Net income attributable to Qualcomm
Basic earning per share attributable to Qualcomm:
Continuing operations
Discontinoued operations
Net income
Diluted earnings per share attributable to Qualcomm:
Continuing operations
Discontinoued operations
Net income per share (EPS)
Consensus EPS
Shares used in per share calculations:
Basic
Diluted
Dividend per share announced
$
29,909
2017E
$ 28,470
2016E
$
$
$
$
22,390
8,261
30,651
$ 21,324
$ 8,180
$ 29,503
$
$
$
19,929
8,019
27,948
$
$
$
18,625
7,862
26,487
$
$
$
16,988
7,878
24,866
$
$
$
12,465
6,656
19,121
$
$
$
9,223
5,734
14,957
$
$
$
6,971
4,011
10,982
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,728
6,130
2,759
552
20,169
10,483
1,379
11,862
(1,779)
10,083
10,083
10,083
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,341
5,590
2,515
503
18,949
8,999
1,258
10,257
(1,539)
8,718
8,718
8,718
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10,686
5,477
2,290
484
18,937
7,550
1,228
8,778
(1,244)
7,534
430
7,964
3
7,967
$
$
$
$
$
$
$
$
$
$
$
$
$
$
9,820
4,967
2,518
331
17,636
7,230
964
8,194
(1,349)
6,845
6,845
8
6,853
$
$
$
$
$
$
$
$
$
$
$
$
$
$
7,096
3,915
2,270
158
13,439
5,682
880
6,562
(1,279)
5,283
776
6,059
50
6,109
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,877
2,995
1,945
114
9,931
5,026
661
5,687
(1,132)
4,555
(313)
4,242
18
4,260
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,301
2,451
1,503
7,255
3,727
766
4,493
(973)
3,520
(273)
3,247
3,247
$
$
$
4.48
0.25
4.73
$
$
$
3.99
3.99
$
$
$
3.14
0.45
3.59
$
$
$
2.76
(0.19)
2.57
$
$
$
2.15
(0.17)
1.98
$
$
$
4.40
0.25
4.65
$
$
$
3.91
3.91
$
$
$
3.06
0.45
3.51
$
$
$
2.70
(0.18)
2.52
$
$
$
2.12
(0.16)
1.96
$
$
5.88
5.68
1,714
$
$
10,326
5,901
2,655
531
19,413
10,090
1,328
11,418
(2,055)
9,363
9,363
9,363
5.46
5.31
1,714
$
$
27,100
2015E
5.09
4.96
2014
2013
1,683
1,714
1,714
$
1.54
2012
1,715
1,754
$
1.20
2011
1,700
1,741
$
0.93
2010
1,658
1,691
$
0.81
1,643
1,658
$
0.72
17
Mehdi Mirsaneh
APPENDIX 2: INCOME STATEMENT FORECAST-PART 2
Inventories
% of sales
Accounts receivable, net
% of sales
$
Trade accounts payable
% of sales
Change in WC
Revenue Change
Equipment and services as % of sales
Annual growth rate
Licensing as % of sales
Annual growth rate
Total Revenue % change
Costs & expenses
Cost of equimpent and services revenues as % of sales
Annual % change
Research and development as % of sales
Annual % change
Selling, general and adminstrative as % of sales
Annual % change
Other as % of sales
Annual % change
Total cost % change
Inestment income as % of sales
Annual growht rate
$
Operating margin
Effective tax rate
$
$
1,686
5.50%
2,759
9%
$
2,452
8%
(75)
$
$
$
1,623
5.50%
2,655
9%
$
2,360
8%
(101)
$
$
$
1,537
5.50%
2,515
9%
$
2,236
8%
(130)
$
5.0%
7.0%
7.0%
1.0%
3.89%
2.0%
5.57%
2.0%
5.52%
35%
35%
37%
20.0%
20.0%
20.0%
9.0%
9.0%
9.0%
1.80%
1.80%
1.80%
3.89%
4.50%
2.45%
4.50%
0.06%
4.50%
38.70%
15%
38.70%
18%
36.70%
15%
$
$
1,458
5.50%
2,412
9.11%
$
2,183
8.24%
203
$
$
$
1,302
5.24%
2,142
8.61%
$
1,554
6.25%
(699)
$
$
$
1,030
5.39%
1,459
7.63%
$
1,298
6.79%
(402)
$
$
$
765
5.11%
993
6.64%
$
969
6.48%
(295)
$
$
$
528
4.81%
730
6.65%
764
6.96%
(494)
70.32%
9.64%
29.68%
-0.20%
6.52%
68.32%
36.29%
31.68%
18.36%
30.05%
65.19%
35.15%
34.81%
16.08%
27.84%
61.66%
32.31%
38.34%
42.96%
36.20%
63.48%
8.30%
36.52%
1.54%
5.73%
40.34%
8.82%
20.68%
10.27%
8.65%
-9.05%
1.83%
46.22%
7.38%
4.64%
27.39%
39.49%
38.39%
19.98%
26.87%
10.13%
10.93%
1.33%
109.49%
31.23%
3.88%
9.55%
37.11%
45.50%
20.47%
30.72%
11.87%
16.71%
0.83%
38.60%
35.32%
4.60%
33.13%
32.61%
47.74%
20.02%
22.20%
13.00%
29.41%
0.76%
#DIV/0!
36.88%
4.42%
-13.71%
30.06%
9.12%
22.32%
4.52%
13.69%
2.80%
0.00%
-100.00%
-7.52%
6.98%
#DIV/0!
33.14%
14.2%
32.95%
16.5%
34.32%
19.5%
38.02%
19.9%
40.91%
21.7%
18
Mehdi Mirsaneh
APPENDIX 3: DCF MODEL
Discount factor
Long term growth rate
Year
10.75%
4.0%
2014
$
Revenue
26,487 $
%Grow th
Operating Income
$
8,778 $
33.1%
Operating Margin
Taxes
Free Cash Flow Yield
10,257 $
11,418 $
11,862 $
11,586 $
11,771 $
11,892 $
12,368 $
36.7%
38.7%
38.7%
36.0%
35.0%
34.0%
34.0%
(1,539) $
(2,055) $
(1,779) $
15.0%
10,083 $
(1,738) $
15.0%
9,848 $
(1,766) $
(1,784) $
(1,855) $
15.0%
15.0%
15.0%
10,006 $
10,108 $
10,513 $
2023
2022E
2014
37,832 $ 39,345 $ 40,919 $ 42,555
4.0%
4.0%
4.0%
34.0%
34.0%
34.0%
(1,929) $ (2,007) $ (2,087) $
15.0%
15.0%
15.0%
7.7%
1.6%
1.0%
4.0%
1,379 $
1,448 $
1,513 $
1,574 $
1,637 $
1,702 $ 1,771 $ 1,841 $
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
(75) $
(97) $
(101) $
(105) $
(109) $
4.0%
(113) $
4.0%
4.0%
7.4%
1,328 $
(101) $
4.50%
(118) $
15.0%
(123) $
4.50%
(128)
0.34%
0.24%
0.30%
0.30%
0.30%
0.30%
0.30%
1,185 $
1,258 $
1,328 $
1,379 $
1,448 $
1,513 $
1,574 $
1,637 $
1,702 $ 1,771 $ 1,841 $
1,915
4.47%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
4.50%
8,135 $
8,589 $
9,262 $
9,752 $
9,905 $
10,004 $
10,404 $
50.8%
49.2%
100.0%
4.50%
0.30%
4.0%
1,915
0.46%
10,008 $
0.30%
4.50%
4.50%
0.30%
10,820 $ 11,253 $ 11,703 $ 12,171
Terminal Value
Free Cash Yield
Current P/E
34.0%
(2,170)
10,933 $ 11,371 $ 11,826 $ 12,299
9.4%
(130) $
4.0%
12,863 $ 13,377 $ 13,912 $ 14,469
1,258 $
-2.3%
2025
0.77%
63,056
60,992
124,047
Projected Equity Value
4.0%
1,150 $
$
NPV of terminal value
36,377 $
4.0%
$
$
NPV of Cash Flows
34,978 $
4.5%
18.0%
CapEx % of sales
Free Cash Flow
33,632 $
5.0%
9,363 $
% of sales
CapEx
32,184 $
3.9%
15.0%
203 $
2021E
30,651 $
8,718 $
4.3%
2020E
5.6%
14.2%
$
2019E
29,503 $
7,967 $
% of sales
Changes in WC
2018E
5.5%
$
16.3%
2017E
27,948 $
(1,244) $
%Grow th
Depreciation & Amortization
2016E
$
Tax Rate
Net Income
2015E
187,522
6.49%
Terminal P/E
15.2
Terminal EV/EBITDA
2.6
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
1,714
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
$
$
67.97
72.37
6.48%
17,790
10.38
19
Mehdi Mirsaneh
APPENDIX 4: SENSITIVITY ANALYSIS OF VALUATION
TV Growth Rate
Sensitivity Analysis:
Discount Rate
$ 72.37
9.25%
9.75%
10.25%
10.75%
11.25%
11.75%
1%
$ 72.42 $ 68.07 $ 64.19 $ 60.71 $ 57.58 $ 54.75
12.75%
$ 49.83
2%
$
77.32 $
72.20 $
67.69 $
63.71 $
60.16 $
56.98
$
54.12
$ 51.52
3%
$
83.79 $
77.55 $
72.17 $
67.48 $
63.37 $
59.72
$
56.47
$ 53.56
4%
$
92.73 $
84.77 $
78.07 $
72.37 $
67.46 $
63.17
$
59.40
$ 56.07
5%
$ 105.87 $
95.02 $
86.23 $
78.96 $
72.85 $
67.64
$
63.14
$ 59.22
6%
7%
$ 127.09
$ 167.18
$ 110.74 $ 98.23 $ 88.33 $
$ 137.90 $ 117.60 $ 102.69 $
80.30 $
91.26 $
73.66
82.22
$
$
68.08
74.89
$ 63.31
$ 68.82
Sensitivity Analysis:
3.64%
1%
2%
3%
4%
5%
6%
7%
TV Growth Rate
12.25%
$
52.18
9.25%
3.7%
10.7%
20.0%
32.8%
51.6%
82.0%
139.4%
9.75%
-2.5%
3.4%
11.1%
21.4%
36.1%
58.6%
97.5%
10.25%
-8.1%
-3.1%
3.3%
11.8%
23.5%
40.7%
68.4%
Discount Rate
10.75%
11.25%
-13.1%
-17.5%
-8.8%
-13.8%
-3.4%
-9.3%
3.6%
-3.4%
13.1%
4.3%
26.5%
15.0%
47.1%
30.7%
11.75%
-21.6%
-18.4%
-14.5%
-9.5%
-3.1%
5.5%
17.7%
12.25%
-25.3%
-22.5%
-19.1%
-14.9%
-9.6%
-2.5%
7.2%
12.75%
-28.6%
-26.2%
-23.3%
-19.7%
-15.2%
-9.3%
-1.4%
20