Today I added Qualcomm as Pick #8 for my Special Report “10 new stock ideas for an old rally” on my JubakAM.com subscription site. The stock is already a member of my Volatility Portfolio on that subscription site. Here’s what I wrote
Pick #8: Qualcomm QCOM). Qualcomm makes this list now for two reasons. First, all the signs are that the “smart” money (I don’t now how smart this money is, but I do know that there’s a lot of it) has decided to go with risk-on, momentum tech plays through the end of the year. The logic is that the trend through the end of the year is up–supported by Wall Street optimism at Donald Trump’s November victory, season cash flows, and the prospect of more interest rate cuts from the Federal Reserve. Second, Qualcomm’s most recent earnings report shows that the company’s new businesses–automotive and Internet-of-Things, have reached the handle of the growth hockey stick and are about to become significant contributors to revenue and earnings. I don’t think the markets have yet fully priced in this development. Revenue in the September quarter was $10.24 billion, up 9% sequentially, up 19% year over year, and at the high end of guidance of $9.5 billion to $10.3 billion. Internet of Things revenue, which includes PC chip sales, was up 24% sequentially and 22% year over year, thanks to new product launches. Auto revenue also grew well, up 11% sequentially and 68% year over year. For the December quarter, Qualcomm expects revenue of $10.5 billion to $11.3 billion, which, at the midpoint, would represent growth of 6% sequentially and 10% year over year. Morningstar calls the stock, up 18.09% in 2024 through November 8, fairly valued. The shares trade with a trailing 12-month price-to-earnings ratio of just 16.5, which is slightly below the price-to-earnings ratio for the S&P 500 as a whole. I think that relatively low PE is a reflection of fears that Apple (AAPL) will soon move away from Qualcomm modems in its iPhones. While Apple has made it clear that it would like to move to an in-house modem chip, the arrival of that Apple chip just keeps moving further out. I’d now pencil in 2028 for significant revenue loss for Qualcomm. In the meantime virtually every handset maker pays Qualcomm a royalty to gain access to the company’s essential wireless patents. Officially, the company’s licensing program allows Qualcomm to earn royalties equal to 3.25% of the net selling price of multi-mode 5G smartphones and 2.275% of the net selling price of single-mode 5G smartphones. In practice Qualcomm negotiates royalty deals with individual phone makers that result in a blended royalty rate in the 2.5% range. The next generation 6G phones represents a challenge to this revenue stream in 2030 and after, but I expect Qualcomm to reinvest enough of current cash flow to preserve its technology position. I’ve owned Qualcomm in my Volatility Portfolio site since January 15, 2024. The position is up 18% in that time.
