Chip maker Qualcomm has two distinct businesses: one that licenses various parts of its technology to smartphone and other device makers, and one that sells 3G, 4G, and 5G chips and software for use in phones, internet of things devices, and automotive markets.
Despite a strong run in 2020 boosted by 5G-related upgrades, Qualcomm (ticker: QCOM) stock has not had such a powerful 2021. Shares have underperformed the
S&P 500 index
and the PHLX Semiconductor index, or
Both indexes advanced 13%, while
retreated by the same amount.
J.P. Morgan analyst
wrote in a note early Tuesday that the business should be worth much more, if investors use a sum-of-the-parts valuation for Qualcomm. Chatterjee has a target price of $175 and rates it an Overweight.
The analyst said his target price is based on shares trading at 19 times full-year 2020 earnings of $9.15 a share. “We believe a 19x multiple is appropriate given Qualcomm’s leadership in 5G, higher operating leverage from revenueuptick in the 5G growth cycle,” Chatterjee wrote.
Chatterjee’s view of Qualcomm stock is ahead the consensus view. The average target price is $170.35, implying a return of 28%. Of the sell-side analysts covering the company, 70% rate it a Buy, with nearly a third placing a Hold rating. A single analyst rates Qualcomm a Sell.
To achieve a price of $175, Chatterjee wrote that he expects one-quarter of the upside to come from Qualcomm’s licensing business, with the remainder from its hardware and software sales. That amounts to about $6.30 a share in fiscal 2022 from its hardware and software, with the remainder of the $9.15 from its licensing business.
Qualcomm’s licensing business, referred to as QTL in Qualcomm’s financial statements, Chatterjee wrote, represents the stable, slow-growing segment that he expects to fund the company’s dividends. But, he wrote that investors aren’t properly thinking about the non-smartphone portion of revenue that is growing in the mid-teens and has achieved a revenue run-rate of roughly $1 billion.
The hardware and software sales segment is faster growing still. Similar to its licensing business, Chatterjee wrote that sales into other non-smartphone markets will drive the segment in the future. Last year, the company generated 78% of its revenue from smartphones, and 22% from its various other products, which Chatterjee expects to change over time.
In the note, Chatterjee wrote that he expects sustainable annual revenue growth of between 10% and 15% for the hardware and software segment, which Qualcomm calls QCT. Profit, however, will grow even more. Chatterjee wrote that he expects it to exceed revenue growth because non-smartphone markets have better profit margins.
Qualcomm shares were flat at $133.34 in Tuesday afternoon trading.
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