Qualcomm: Annual Earnings of Tens of Billions, Should the Chip King Only be Valued at 10 Times PE Ratio?

The latest release of Xiaomi Group-W.HK 13 high-end series, once again equipped with the second-generation Snapdragon 8 flagship chip from Qualcomm. Qualcomm, who frequently appears at new product launches for phones, has become the standard for Android high-end flagship smartphones worldwide. However, who would have thought that Qualcomm, which earns billions of dollars annually, has a market value of only tens of billions. As the king of Android phone chips, with a valuation of only 10 times, this really isn't expensive?

In the previous article, Dolphin Analyst mainly introduced the basic situation of Qualcomm, "the foundation of the mobile phone market is stable + there is potential for growth," and the company's position in the high-end Android phone market continues to rise. This article mainly revolves around grasping the investment opportunity of Qualcomm, mainly from the perspectives of income estimation, profit estimation, and valuation pricing of the company.

Combining the industry and company situation, Dolphin Analyst expects $ Qualcomm.US to achieve revenue of 45.7/54.1 billion US dollars and a year-on-year increase of 3.3%/18.5% in FY2023-2024. Net profit was 11.8/14.7 billion US dollars, a year-on-year growth of -9.5%/24.7%. The company will still be affected by industry weakness in FY2023, while FY2024 is expected to achieve a rebound.

Regarding Qualcomm's valuation situation, Dolphin Analyst starts from two perspectives: PE valuation and DCF valuation. ①Referring to the company's historical PE and 2023 profit situation, the company is currently just over 100 billion US dollars in a relatively low position.②Under the DCF model calculation, the company's per-share valuation corresponds to 150 US dollars/share, which still has 33% room for growth compared to the current company stock price.

Dolphin Analyst believes that Qualcomm has the advantage of long-term technological leadership and will continue to maintain its leading position and industry status in semiconductor technology in the future. However, with a profit of over 10 billion US dollars annually, the valuation is still relatively low at around 10 times, and it is expected to return to the central valuation of 14-15 times PE in the future.

However, the company's current valuation is low and the stock price is weak, mainly due to the impact of weak mobile phone demand and the downturn in the semiconductor industry. It is in the "left interval", and the performance inflection point has not yet arrived. Now downstream manufacturers such as Xiaomi have begun to show signs of inventory disposal. Although the downstream haulage may still not be good in the next quarter and inventories are still high, with inventory disposal, cost control, and the return of downstream manufacturers to a reasonable water level, the company is expected to usher in a turning point for business operation to rebound. If the stock price is corrected, there will be an opportunity for Qualcomm to have a PE valuation of less than 9 times, which will bring a better investment safety buffer.

The following is Dolphin's profit estimation and valuation analysis of Qualcomm:

I. Income estimation

From Qualcomm's financial report, we can see that the company's largest source of revenue comes from CDMA technology (that is, semiconductor technology), and the largest application in the semiconductor business is in the mobile phone field. In the latest quarter's financial report, Qualcomm's semiconductor business revenue accounted for 86.9%, and the mobile phone business accounted for 60% of the company's total revenue. Therefore, when predicting the company's income, it is necessary to focus on the company's mobile phone business for estimation.

1) Calculation of the QCT Mobile Business:

As seen in Dolphin Analyst's previous in-depth article on the company, "Qualcomm (Part 1): The 'Big Boss' Behind Android Phones," Qualcomm's mobile business mainly includes two parts: baseband chips and SoC chips. When calculating the revenue of the mobile business, we must first understand what is more closely related to it.

The first thing that comes to mind is the performance of the downstream mobile market. Is the growth of the company's mobile business closely related to it?

However, when we compare Qualcomm's mobile business with the performance of the global mobile phone market, we find that there is a significant difference in growth rates between the two. For example, in the second half of 2021, global smartphone shipments have declined, while Qualcomm's mobile business still saw growth of over 40%. Therefore, while Qualcomm's mobile business is somewhat related to global smartphone shipments, the correlation is not particularly high.

As Qualcomm's downstream customers are mainly Android manufacturers, let's take a look at the correlation between Android phone shipments and Qualcomm's mobile business. Dolphin Analyst examines the global shipments of OPPO and Xiaomi to evaluate the correlation of Qualcomm's mobile business. As shown, due to restrictions from H suppliers, OPPO and Xiaomi saw an increase in shipments of over 60% in the first half of 2021. And Qualcomm's mobile business also saw a growth of over 50%, which began at the end of 2020.

Due to strong demand for smartphones in the first half of 2021, Android manufacturers such as OPPO and Xiaomi continued to increase their inventories in the second half of the year. Unfortunately, the demand for smartphones began to decline, and the rise of Honor took away some market share. However, this did not significantly impact Qualcomm's mobile business, mainly due to the inventory competition between brands such as OPPO and Xiaomi, as well as Honor's restocking, continuing to drive high growth for Qualcomm's mobile business. From the performance of Android phones, Dolphin Analyst believes that Qualcomm's mobile business is strongly correlated with the Android market's shipments.

However, looking at the shipments of OPPO+Xiaomi and Qualcomm's mobile business, there is a significant divergence in 2022. In theory, Qualcomm's mobile business should also experience a significant decline, but the company still maintains growth of over 40%. This is because Samsung has increased the share of Qualcomm chips in its high-end phones. The Samsung Electronics US S22 series, released in March 2022, increased the share of Qualcomm Snapdragon chips to 75%. After Samsung increased its purchases of Qualcomm chips, it directly boosted Qualcomm's smartphone chip market share. Even faced with a declining smartphone market, Qualcomm still achieved high growth. This explains why Qualcomm's smartphone business has grown against the trend this year.

Therefore, Dolphin Analyst believes the following factors have influenced the growth of Qualcomm's smartphone business: ① global demand for smartphones, ② structural performance of Android manufacturers, ③ the company's share in the smartphone chip market.

Taking these three factors into consideration, Dolphin Analyst predicts Qualcomm's smartphone business as follows:

① Global demand for smartphones: Under the impact of factors such as the pandemic, global smartphone shipments have declined for five consecutive quarters. As the impact of the pandemic weakens, economic activities are expected to recover. Global smartphones are expected to see a warming trend, but the significant recovery of downstream demand may occur after the second half of 2023. As smartphones are a mature market, overall market demand will see repair rather than high growth;

② Structural performance of Android manufacturers: In the process of this demand decline, Android manufacturers were the most affected, with double-digit declines for three consecutive quarters. Due to poor demand, Android manufacturers have slowed down the frequency of purchases and focused their main efforts on inventory digestion. Taking Xiaomi as an example, the continuously rising inventory since the beginning of the year has begun to show signs of depletion. When inventory levels return to a reasonable level, Android manufacturers' purchasing elasticity will be better than Apple's;

③ The company's share in the smartphone chip market: As Apple adopts a self-developed chip approach, Qualcomm's customers are mainly Android manufacturers. Currently, Qualcomm has the highest share in high-end Android branded smartphones. Only by capturing the high-end market can the company achieve more profits, which is also the main factor for the company's nearly 60% gross profit margin. However, given the company's current market position, there is little room for further growth in the high-end smartphone market.

④ Based on the above three factors, Dolphin Analyst predicts that the company's future smartphone business will begin to decline in the fourth quarter of 2022, mainly due to pressure from downstream customers to reduce inventory, which reduces the demand for mobile chip loading. Signs of warming are expected to appear in the second half of 2023.

2) Evaluation of other business income

① Radio frequency business (QCT): The business accounts for about 10% of the total, mainly including 4G, 5G sub-6, and 5G millimeter wave radio frequency products. As the penetration rate of 5G continues to rise, the gain effect brought by 5G weakens. Moreover, affected by the overall slump of the smartphone market, the radio frequency business has shown a significant decline. Dolphin Analyst believes that before new communication technologies emerge, the radio frequency business will be affected by the overall growth rate of the smartphone market;

② Automobile business (QCT): Boosted by the trend of automobile intelligentization, the business is growing rapidly, but the overall business size is still small, accounting for less than 5%. In the short term, it will not exert a significant impact on the company's performance. ③IoT Business (QCT): The business accounts for around 15% and covers multiple downstream areas such as PCs, tablets, XR, among others. As the company's technological leadership can be applied in many downstream areas, a downturn in a single area does not affect the overall growth of the IoT business, which is expected to maintain double-digit growth.

④Technology Licensing (QTL): This business accounts for around 10-15% and mainly involves licensing fees for the technology patents the company has developed or acquired over the years. Based on the company's technological leadership in the mobile phone sector, many low- to mid-range smartphones use the company's patented technology, even if they did not purchase the company's chips. As a result, this business has a certain correlation with the overall shipment volume of the mobile phone market.

Since most of the time, the revenue of QCT and QTL businesses account for 99.5% of Qualcomm's revenue, after completing the expected revenue calculations for these two businesses, Dolphin Analyst predicts that Qualcomm's revenue in FY2023-FY2024 will be $45.7 billion and $54.1 billion, respectively, with a YoY growth of 3.3% and 18.5%.

II. Profitability Analysis

After calculating the revenue, Dolphin Analyst mainly considers the impact of gross profit margin and operating expenses on the final profit in profitability analysis.

1) Gross Profit Margin:

As Qualcomm has leadership in chip technology, the company's gross profit margin remains at or above 55% in the long term. But even with a high gross profit margin, there may still be fluctuations. In the case of a clear weakness in the downstream smartphone sector, the company's inventory has also been increasing quarterly. The company may carry out promotions or inventory devaluation measures in the coming period, thereby reducing the company's high inventory to some extent.

Inventory handling will affect the company's gross profit margin. Dolphin Analyst expects Qualcomm's gross profit margin to show signs of decline next year but may recover as the downstream market improves.

2) Expense Ratio:

For Qualcomm, although the company has high gross profit margins, half of it goes toward operating expenses. Due to the downturn in the downstream sector, the company's inventory has been rising, and its high growth is likely to be unsustainable in the next quarter.

Given the pressure on the industry and the company's operations, the company's CEO Mr. Amon mentioned in the last quarter report exchange that "the company will take measures such as recruitment freezes and prepare to further reduce operating expenses as needed." Therefore, Dolphin Analyst has reduced its prediction for future operating expenses. As the market rebounds, the company's expenditure may return to expansion.

3) Profit Situation:

① Gross Profit Margin: Dolphin Analyst expects the company's gross profit margin to decline in 2023 and return to around 57% after 2024;

② Expense Ratio: Due to the cautious outlook on the market, Qualcomm has begun to tighten recruitment and control expenses. With high-tech companies' emphasis on technological research and development and the market stabilizing, R&D expenses and other expenditures are expected to pick up;

③ Net Profit: Based on previous revenue expectations, Dolphin Analyst estimates Qualcomm's net profit for FY2023-2024 to be $11.8/$14.7 billion, with a YoY growth rate of -9.5%/24.7%. Due to the impact of weak downstream markets and high inventory, there is a risk of a decline in net profit in the 2023 fiscal year, while the 2024 fiscal year will rebound with the downstream market.

III. Valuation Estimation

For Qualcomm's valuation, reference is made to the PE and DCF valuation methods:

1) PE Valuation Method:

Combining the previous calculations, Qualcomm is expected to achieve net profits of $11.8/$14.7 billion in the fiscal years 2023-2024, with a YoY growth rate of -9.5%/24.7%.

Looking at Qualcomm's historical PE ratio, a PE ratio of 9-15 times is already below the company's historical average. Taking 9-15 times PE as a reference, the valuation of Qualcomm's profits in the fiscal year 2023 corresponds to $106.2-$177.0 billion, or a stock price of $95-$158 per share. The current stock price of $112 is also on the low end of the range.

Source: Wind, Dolphin Research

2) DCF Valuation Method:

Based on the performance estimates in the previous section, the valuation is considered from the perspective of the company's future cash flows. Assuming a WACC of 12.11% and a perpetual growth rate of 2%, Qualcomm corresponds to a DCF valuation of $150 per share, which still has an upside potential of 33% compared to the current stock price.

Based on the comprehensive valuation of both PE and DCF, Dolphin Analyst believes that Qualcomm has technological leadership and future sustainability. However, its current market value of around $100 billion does not fully reflect the position of a technology company that releases more than $10 billion in profits every year. Of course, this is also due to the adverse effects of the current industry downturn and the company's rising inventory, which will continue to pressure profits in the short term. But after this round of industry downturn is over, the company's value is expected to be reassessed.

December 8, 2022, In-depth report on Qualcomm: Qualcomm (Part 1): The "Big Boss" behind Android Phones

December 1, 2022, Inventory changes in Xiaomi: Xiaomi: The "Three Arrows" of Crisis Reversal

June 24, 2022, Semiconductor Industry Review: Bulk Cancellation, Is the Semiconductor Industry Really Changing?

June 17, 2022, Consumer Electronics Industry Review: Consumer Electronics is "Ripe", Apple is Strong, Xiaomi is Struggling

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