Optimistic – For the next 5 years owner earnings grow at 20% annually, then that rate falls to 10% annually for another 5 years, and finally to 3% annually in perpetuity.
Quite Optimistic – For the next 5 years owner earnings grow at 25% annually, then that rate falls to 12.5% annually for another 5 years, and finally to 3% annually in perpetuity.
To value the company under these different scenarios I’ll do a discounted cash flowcalculation, using a discount rate of 12% and 15% to define a fair value range. The results are in the table below.
| Scenario | Low-end | High-end |
|---|---|---|
| In-line | $50.47 | $63.70 |
| Optimistic | $60.34 | $78.38 |
| Quite Optimistic | $72.99 | $97.37 |
The current market price of about $66 is just above the high-end of the in-line scenario. Which scenario is the most realistic? It’s hard to say. Technology changes fast, and trying to predict things 5 years or 10 years out is basically just guessing. It looks to me that QUALCOMM, Inc. (NASDAQ:QCOM) is probably roughly fairly valued. It’s not as cheap as many people seem to think, but it’s also not significantly overvalued. The stock would look a lot better to me in the $50’s than it does now.
Fierce competition
Qualcomm faces competition of two different types. First you have companies like NVIDIA Corporation (NASDAQ:NVDA), which use the same ARM architecture in their chips as Qualcomm does. NVIDIA has the Tegra line of mobile processors and recently announced the newest version, the Tegra 4. Along with this NVIDIA announced the Tegra 4i, a version which has integrated LTE, in a direct attempt to knock Qualcomm off of its dominant LTE market position.
From an investment perspective NVIDIA is about as cheap as cheap gets. With a stock price of just over $12 per share, net cash of $6 per share, and free cash flow of about $1 per share, NVIDIA Corporation (NASDAQ:NVDA) is trading at completely irrational levels.
On another front Qualcomm faces the Intel Corporation (NASDAQ:INTC) juggernaut. Intel uses a different architecture in its chips, x86 instead of ARM, and has as of now very little presence in the mobile market. But Intel will power many of the Windows-based tablets coming to the market, and if these gain any traction with consumers Intel could see its market share rise considerably.
Intel has been spending a huge amount on capex in the last couple of years, $10.7 billion in 2011 and $11 billion in 2012, as the company races to build faster and more efficient chips. This is almost 10 times as much as Qualcomm spends annually, so Intel Corporation (NASDAQ:INTC) should not be counted out. Intel also spent $10 billion on research and development in 2012 compared to Qualcomm’s $3.9 billion, even though Qualcomm’s market cap is about 10% higher than that of Intel. Intel is spending a lot of money in an attempt to be competitive here, and if I were QUALCOMM, Inc. (NASDAQ:QCOM) I’d be very afraid.
Intel Corporation (NASDAQ:INTC) also pays a 4.2% dividend yield, which is about the highest you’ll find out of the big tech companies these days.
The bottom line
Qualcomm is more expensive than it appears. I think at best the stock is fairly valued and I’d want to see it fall into the $50’s before even considering it. The company faces increasing competition from the likes of NVIDIA Corporation (NASDAQ:NVDA) and Intel, and it’s unlikely that they’ll be able to maintain their mammoth market share for all that much longer. I don’t think the growth justifies the price at $66 per share, and I’d wait for a significant pullback before buying any shares of Qualcomm.
Timothy Green owns shares of NVIDIA. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm.
