We had discussed a potential long side trade on QCOM over the past week, but did not pull the trigger. Well, at 7:30 am EST this morning, QCOM boosted its share buyback by $5 billion and increased its quarterly dividend by 20%.
QCOM has one of the cleanest balance sheets I’ve seen for a $100+ billion market cap company. Management runs the company with a focus on its bread and butter chip business, with very little financial engineering or leverage. QCOM has been at the forefront of innovation in wireless chips. That secular trend in addition to splendid management execution has led to positive earnings and sales growth in 9 out of the last 10 years (and earnings more than 4x the level of 10 years ago).
QCOM chips provide a lot of the cool functionality that are now commonplace on cell phones, as management described in its most recent release:
The MSM integrated circuits, which include the Mobile Data Modem, Qualcomm Single Chip and Qualcomm Snapdragon processor devices, perform the core baseband modem functionality in wireless devices providing voice and data communications, as well as multimedia applications and global positioning functions.
With the introduction of 4G and the continued innovation in the smartphone sector, the overall secular trend remains strongly in QCOM’s favor.
As for the stock’s valuation, this is what I wrote about QCOM in an Earnings Preview in late January:
The recent weakness in the smartphone market overall (see Samsung and Apple earnings) is a cause for concern for QCOM. The stock broke below its 50 day average yesterday on AAPL earnings for the first time since mid-November. While QCOM is quite diversified when it comes to chips for mobile devices, with no one manufacturer dominating its revenues, the overall market weakness will certainly be on investors’ minds when QCOM shines more light on 2014 guidance.
However, one major positive for QCOM is its stellar financial position and relatively cheap valuation. At 18x 2013 earnings, with 10-15% average earnings growth expected for the next 2 years, the stock is a better priced company than most large-cap tech companies. The reason for the cheap valuation is the skepticism in the market on the earnings growth over the next couple years. If QCOM can match those analyst estimates, the stock’s likely headed higher. On the other hand, a cut in near-term guidance a la AAPL could see the stock test $65 support in the coming weeks.
QCOM delivered a stellar quarterly result, and the stock hit its highest level since the tech bubble (when the stock topped out at $100.00 exactly). In a market that looks broadly expensive, QCOM is a much more attractive relative value.
The stock is trading at $76 in the pre-market after the buyback news. Given QCOM’s pristine balance sheet and favorable outlook for 2014, investors are excited by the management move. The $76.75 level was the high in mid-February, while $70 is important long-term support:
An ideal long entry would be near the $70 breakout level marked in green. The stock is trading above both the rising 50 day and the rising 150 day ma’s in today’s pre-market, so we might not get an opportunity in the near-term. Nonetheless, we wanted to lay out our thoughts in the off chance that we do get an entry in QCOM before the next earnings report.