Up 15% YTD, Is Qualcomm Stock Still a Buy?

The growth potential for artificial intelligence (AI) as the technology is adopted across a wide spectrum of industries has been a hot topic for investors over the past year. Touted as one of the most influential and revolutionary technological developments of the past century, AI looks poised to impact just about every aspect of daily life in the coming years.

And the proverbial beating heart of this AI revolution are specialized semiconductor chips, an essential component to the computing architecture necessary for advanced AI tasks. With the global chip industry set to reach a market size of $1.13 trillion by 2033, semiconductors are effectively among the “shovels” being used to dig up the AI “gold.” 

While the AI chip stocks that have benefited the most so far are names like Nvidia (NVDA) and Advanced Micro Devices (AMD), old-school semiconductor company Qualcomm (QCOM) shouldn't be overlooked as the next wave of AI deployment rolls out to devices. Here's a closer look at QCOM.

About Qualcomm Stock

Founded in 1985 and based out of San Diego, Qualcomm Inc (QCOM) designs and licenses semiconductor chips for mobile devices and wireless communication devices such as processors, modems, and RF systems. The company is also expanding into automotive technology and computing markets. Its market cap stands at a mammoth $182 billion.

Qualcomm stock has gained a healthy 15% on a YTD basis, outpacing a 10.5% gain in the tech-heavy Nasdaq-100 Index ($IUXX). Longer term, QCOM is up 35% over the past 52 weeks. 

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Even after such a strong share price performance, Qualcomm stock remains reasonably valued at current levels. The stock is priced at 16.86x forward adjusted earnings, marking a discount to the tech sector median of 25.24 and its own 5-year average of 17.04. 

The stock also offers a dividend yield of 1.96%, which is more generous than the tech sector median. Moreover, Qualcomm has raised its dividend consistently each year for 20 years, putting the company on pace to achieve Dividend Aristocrat status in this decade - particularly with a modest payout ratio of about 36%, which suggests the dividend is well-covered by QCOM's earnings.

But does QCOM have the legs to run higher? Let's see what analysts are saying.

QCOM Beats on Fiscal Q1 Earnings

Qualcomm's latest results for its fiscal first quarter were strong, with both revenue and earnings exceeding Wall Street's expectations. In the quarter, the company reported revenues of $9.9 billion, up 5% from the previous year. The top line was driven by 7% yearly growth in its core QCT business to $8.4 billion. With a margin of 31% for the business, this can be attributed to the improvement in revenue scale, better product mix, and continued operating discipline. Revenues from the company's expanding automotive business also shot up by 31% from the previous year to $598 million.

EPS rose even more sharply, up 16% year-over-year to $2.75, which topped the consensus estimate of $2.37. Notably, QCOM has an impressive history of surpassing Wall Street's EPS expectations that stretches all the way back to April 2020.

On the liquidity front, the company closed the quarter with a cash balance of $8.2 billion, up markedly from the previous year's $5.1 billion. This dwarfs the company's short-term debt levels of $914 million.

Looking ahead, analysts are expecting the company to report earnings growth of 15.7% for fiscal year 2024, and roughly 11% for fiscal 2025. Revenue is expected to increase 6.14% in 2024, and 8.28% in 2025, on average.

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How Will Qualcomm Benefit from AI?

Speaking at the 2024 Mobile World Congress in Barcelona recently, Qualcomm CFO and COO Akash Palkhiwala told Yahoo Finance how his company is poised to benefit from the next wave of AI deployment: 

“You're already seeing the benefit of large language models on data centers. We've seen this show up in the financial performance of some of our peers. I think what's going to happen next is these models are going to be deployed on edge, on devices at large scale, and this includes not just phones but PCs and automotive and IOT [Internet of Things] devices, and that's a tremendous opportunity for Qualcomm, as these models get deployed in these devices.”

Meanwhile, Qualcomm has been extending some of its licensing agreements with key mobile device partners. The most significant among them is the one with Apple (AAPL). The iPhone maker exercised its 2-year extension option to push out the date on its licensing agreement with Qualcomm till 2027, showcasing its reliance on the company's modems. Further, 2 Chinese OEMs also extended long-term agreements with Qualcomm.

Qualcomm also announced the Snapdragon 8 Gen 3 Mobile platform, which brings generative AI capabilities to top-tier Android smartphones. Leading smartphone player Samsung already incorporating the platform into its Samsung Galaxy S24 Ultra. Notably, Qualcomm also extended a multi-year agreement with Samsung which will allow Snapdragon platforms to be used for flagship Galaxy smartphone launches from 2024.

QCOM's Broad Portfolio

For investors who may be leery of going all-in on AI chip specialists, Qualcomm's portfolio extends beyond smartphones. For starters, the automotive segment remains a crucial business for the company. Qualcomm announced that in 2023, 75 new models were launched commercially with the Snapdragon Digital Chassis Solution. Moreover, the company has announced a partnership with Bosch, a leading global supplier of technology and services for the automotive industry. The partnership will entail Bosch using Qualcomm's Snapdragon Ride Flex system-on-chip in the former's new central vehicle computer.

With mixed reality also gaining momentum, as highlighted recently by device launches from Apple and Meta Platforms (META), Qualcomm recently announced the Snapdragon XR2+ Gen 2, which the company believes will bring about very high-quality and immersive mixed reality and virtual reality experiences. Qualcomm did partner with Samsung and Google to bring about XR experiences for Galaxy end users using the Snapdragon XR2+ Gen 2.

On the Internet of Things front, the company announced the Snapdragon X35 5G Modern-RF system, which is the 1st 5G NR light Modem RF system in the world, designed to deliver a unified 5G platform for IoT devices.

What Do Analysts Expect for QCOM Stock?

Analysts have an average rating of “Moderate Buy” for QCOM stock. Out of 25 analysts covering the stock, 15 have a “Strong Buy” rating, 9 have a “Hold” rating, and only 1 has a “Strong Sell” rating.

The mean target price from this group is $150.38, which represents a discount of about 10%. However, three separate analysts maintain a Street-high target price of $180 - Canaccord Genuity, KeyBanc, and Wolfe Research. This forecast denotes an upside potential of about 7.8% from current levels. 

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On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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