What Opportunity Does Qualcomm Bring Investors?

One of the best-performing stocks of late has to be Qualcomm (QCOM). This chip maker recently soared to a new all-time high this month on a variety of catalysts.

This is a company that’s devoted to developing next-generation chips for the burgeoning Internet of Things (IoT) space. Qualcomm is also a company that’s integral to the functioning of the communications sector, providing a range of software and wireless technology services to bolster growth in the 5G space.

However, given how fast QCOM stock has run, there’s undoubtedly some concerns about this company’s valuation. I’m currently bullish on this stock. (See Analysts’ Top Stocks on TipRanks)

Ready for Bigger Picture

The recent move from smartphone maker Apple (AAPL) to shift its reliance on Qualcomm to a more diversified group of chip makers (as well as produce some chips internally) has provided QCOM stock with its fair share of bears.

There are concerns that a strained relationship between Apple and Qualcomm could be indicative of the potential for slower growth moving forward. However, the market appears to be taking a contrary view, looking at this company’s valuation right now.

That’s generally because Qualcomm is not reliant on any single customer or market for growth. This is a company that’s also diversified in how it chooses to do business. Given the global semiconductor shortage that’s gotten a lot of attention of late, Qualcomm is in a great position in terms of pricing power and margins for the foreseeable future.

Qualcomm is also confident that the company’s next-generation chips represent the future of the metaverse. Recently, metaverse-related stocks have absolutely taken off. Qualcomm’s ties to the IoT space and its high-quality performance chips provide investors with exposure to a growth niche other chip makers haven’t targeted as aggressively.

As mobile chips continue to iterate toward greater computing power, and the ability to support growth areas like the metaverse, this segment is likely to get more competitive. For now though, Qualcomm appears to have a leg up on the competition.

It’s expected that Qualcomm will still produce around one-fifth of the chips required for the 2023 iPhone. This is a significant drop from previous numbers. However, investors appear to be very bullish on Qualcomm’s ability to make up the difference (and then some) with its next generation chips.

What’s Next for QCOM?

According to the company’s CEO, Qualcomm will look to focus on the transformation of PCs, which is now more dynamic. The company’s focus is on the need for constant cloud connectivity to collaborate and run video games. 

Further, analysts believe Qualcomm is in a very good position to become the preferred provider for PCs, with the transition to ARM looking inevitable. 

In fact, QCOM is currently working on its next generation of ARM-based CPUs, which will compete with Intel (INTC) and AMD (AMD) CPUs.

QCOM is also expected to expand its current $100-billion annual TAM to potentially $700 billion. The company is looking to achieve this by diversifying its offerings in automobiles, PCs, and new forms of wireless networking, such as fixed wireless broadband.

The company’s CFO further stated that nearly 87% of the company’s addressable market is Android, and Qualcomm is actively looking to grow this business.

QCOM Financials

QCOM recently announced a dividend increase to $0.68. This move improves the company’s existing yield to a more respectable 1.5%, and provides a meaningful income argument to owning this stock.

Qualcomm was able to make this move, due to a rather impressive earnings beat of late. The company generated revenue in Q4 of $9.34 billion and adjusted EPS of $2.25 – up by 12% and 76%, respectively, year-over-year. On the other hand, its operating revenue was also up 98% to $11.8 billion in 2021 from $5.9 billion in 2020.

Qualcomm’s flagship business is not sitting idle either. Revenue from smartphones was up 56% to $4.69 billion in the last quarter.

Qualcomm expects its sales of IoT chips, low-power chips for smart appliances to increase to $9 billion in revenue by 2024, a jump from $5.06 billion in 2021. Its automotive business can generate revenues amounting up to $8 billion in the next 10 years, up from $1 billion in 2021. This will be partially courtesy of QCOM’s new partnership with BMW, where it will provide the chips for self-driving cars.

Wall Street’s Take

As per TipRanks’ analyst rating consensus, QCOM stock is a Moderate Buy. Out of 21 analyst ratings, there are 13 Buy recommendations and eight Hold recommendations.

The average Qualcomm price target is $194.61. Analyst price targets range from a high of $225 per share, to a low of $150 per share.

Bottom Line

As the largest chip producer in the world, Qualcomm is ably positioned to gain significant market share in the metaverse space.

As the metaverse rises through the ranks and takes up more investor bandwidth, Qualcomm is a company that could really take over in terms of growth in the chip space.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.