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Stock Spotlight: Qualcomm

A Wireless Wonder

10 – 12 minute read

Published December 19, 2022

At Qube, we have to act as futurists, interpreting new technology and envisioning its potential long-term impacts as best. We do so using the knowledge we have of the past and present. Indeed, our clients will know that our focus remains steadily on the coming 10 to 15 years.

A city of the future with skyscrapers and flying vehicles.

It is with this in mind that we turned our attention to Qualcomm (QCOM). The company is a relatively recent addition to Qube’s Kaleo portfolios. We took a position in Qualcomm on November 8, 2022 at a price of $113.33. Since then, the company has produced a total cumulative return on investment of 9.6%, on a constant currency basis.

Remarkably, our investment in this world-changing company returned more than the average annual stock market gain over just four trading days. Despite the dramatic price increase in this extremely short investment period, we still hold Qualcomm rather than selling our position. It is our belief that Qualcomm will provide further outsized performance long term. This belief is based on two key factors: the strength of Qualcomm’s core business and the potential of its addressable market expansion.

Present-Day Qualcomm

The current circumstance that tipped us off to Qualcomm’s grand future of possibilities is their deep patent pool of semiconductor chips and their ability to protect these patents. The backbone of Qualcomm’s business is the sale of chips to Apple, Samsung, and various other smartphone manufacturers.

These chips can be divided into two groups: wireless modems, such as 3G & 4G, and application processors (primarily through their Snapdragon line). According to third-party sources, Qualcomm is the leading player in both categories.

Qualcomm Logo
A pie chart of Global Smartphone AP Market Shares by Revenue. Qualcomm leads the pack with 44%, followed by Appl with 23% and MediaTek at 22%.
Bar chart of processor revenue shares. Qualcomm towers above the rest at 55.7% for 2011, with MediaTek trailing at 27.6% and Samsung LSI at 7.4%.

Qualcomm’s chips are found abundantly in current smartphone offerings. They appear in approximately 40% of Samsung’s Galaxy S22 phones and more than 75% of the upcoming Galaxy S23 models. You can also expect to see Qualcomm’s modems in almost 100% of Apple’s upcoming iPhone 15 and iPhone 16 models.

There were two incidents, both involving Apple, that gave our team confidence in Qualcomm’s ability to not just protect their patents, but also generate a return on their investment.

In 2019, Apple settled against Qualcomm in their multi-billion-dollar lawsuit over royalties owed to Qualcomm from their patents. As a result of this settlement, Apple paid Qualcomm an undisclosed sum, and the parties negotiated a six-year license agreement. 

Still eager to be in on the action, Apple then attempted to invalidate some of Qualcomm’s patents, but Qualcomm won the case again. To cement the outcome, the US Supreme Court officially declined to hear Apple’s appeal in mid-2022.

After Qualcomm’s multiple wins regarding the validity of their patent portfolio, anyone who considers developing their own modems with mobile network connectivity will need to step very carefully around Qualcomm’s over 163,000 active patents. As Apple found out, it is probably safer and easier to just use Qualcomm’s chips—at least for the near future.

A Vision of the Future

In the future, Qualcomm will likely be able to use these patents with global impact in ways we have yet to imagine. Today, Qualcomm has an addressable market of about $100 billion through several segments: premium Androids, wireless communications, automotives, and the Internet of Things.

Internet of Things (IoT) is the system of physical smart devices all interlinked by the internet. The system grows continuously as more and more everyday items become “smart,” such as watches, fridges, thermostats, etc.

We believe Qualcomm’s addressable market has the potential to expand 700%—approximately $700 billion—through the proliferation of 5G and all its downstream benefits to autonomous vehicles, artificial intelligence, cloud computing, and other emerging industries. According to an independent study from Berkeley Research Group, by 2035, organizations around the world will have evolved their business models to take full advantage of 5G.

A surface-level glance may show that 5G is nothing more than the usual improvements—higher speeds and lower latency. In mobile networks, these upgrades have happened every decade since the 1980s started with 1G. However, though this seems to be business as usual, it is precisely because of higher speeds and lower latency that the world can now take advantage of mobile networks in a way that was previously impossible. These improvements can, and have, fundamentally changed the way people live and businesses operate.

In computing, latency is the period of time between a request for a data transfer and the beginning of that transfer. If you have ever clicked a link and had to wait forever for it to load, you have experienced high latency.

Take the rollout of 4G throughout the 2010s as an example. Like previous iterations, 4G can be seen as simply a faster 3G, but this conclusion would be a gross understatement of its effects on society. 4G brought the things we used to do on a laptop or a desktop to mobile. As a result, there is now an app for almost everything: banking, photo sharing, video streaming, social media, e-commerce, etc. If you use FaceTime, Uber, Instagram, or similar apps, you have 4G to thank.

Following on the success of 4G, we believe 5G will be even more transformative to society. The mind boggles when we think about potential effects to the medical industry, emergency disaster responses, automotive safety, and more. Environmental sustainability is one use case that intrigues us in particular. Due to 5G’s low latency networks, it is possible to provide real-time monitoring and optimization to water and energy usage. This opens up doors beyond decreased app loading times and reaches into the future to affect our children and grandchildren.

Depictions of the projected potential benefits of Qualcomm's 5G on the environment, ranging from reduced greenhouse gas emissions to lower pesticide use.

The speed, accessibility, and capacity of 5G also makes it possible to connect all your devices to the cloud. These devices could then integrate with AI and share information. Some applications are already cropping up, like autonomous vehicles and shipping hubs. While it is still early days for 5G, we feel confident that its progress will benefit Qualcomm’s free cash flows.

Text reads: 5G touching all aspects of your life, even a dress. The image shows a chain of events from sustainable farming, to manufacturing and delivery all made more efficient by use of Qualcomm's 5G chips.

Source: Qualcomm

Valuation Models

Though there is a potential for a seven-fold increase in Qualcomm’s addressable market, we modelled out revenues to merely double over the next 10 years, from $39 billion to $82 billion. We believe this pessimistic forecast is appropriate because it takes into account potential delays to our 5G thesis. It also accounts for increased competition that may result from a more lucrative environment–a kind of “gold rush” scenario as we have seen so many times in the past and will likely see again in the future.

In terms of operating margins, we have baked in higher inflationary pressures through a reduction in margins, relative to historical averages. We believe these margins will recover back to historical averages over time as supply disruptions abate. Our ending margin of 29.74%, over the 10-year period, is conservatively in line with the semiconductor industry average of 31.27%.

As for capital expenditure requirements, we have modelled an approximate 200% increase–from $38 billion to $72 billion–which aligns with the doubling revenue over the 10-year period. Overall, we modelled a lower capital expenditure increase, relative to the increase in revenues, because we believe there are efficiencies that the company can exploit during their addressable market expansion. The same technology used to power smartphones can now be used to drive multiple end-use cases. We believe there is likely only a minimal amount of additional investment necessary for these extra sources of revenue.

After inputting all appropriate variables, our calculated intrinsic value for Qualcomm comes to $186.56. At a current price of $124.21 (as of writing), we believe there is further upside potential of approximately 50%.

In Conclusion…

Though the technological advancements in decades to come will be complex, we use our collective, contemporary knowledge to see their potential and find value. Qualcomm has proven themselves capable of safeguarding their patents, tussling with a tech giant and coming away victorious. And the historical pattern of success from 1G all the way to 5G tells us that any consequent innovation will have staggering effects.

Our in-house research team continues to search for undervalued companies using our multiphasic discounted cash flow methodology. These carefully crafted valuations empower us to select the most suitable companies to make our clients’ wealth matter over the long term. If you want to learn more about our research process, visit this page. You can also reach out to our team by emailing info@qubeinvest.ca or giving us a call at (780) 463-2688.

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.

Stock Spotlight: Qualcomm

A Wireless Wonder

10 – 12 minute read

Published December 19, 2022

At Qube, we have to act as futurists, interpreting new technology and envisioning its potential long-term impacts as best. We do so using the knowledge we have of the past and present. Indeed, our clients will know that our focus remains steadily on the coming 10 to 15 years.

A city of the future with skyscrapers and flying vehicles.

It is with this in mind that we turned our attention to Qualcomm (QCOM). The company is a relatively recent addition to Qube’s Kaleo portfolios. We took a position in Qualcomm on November 8, 2022 at a price of $113.33. Since then, the company has produced a total cumulative return on investment of 9.6%, on a constant currency basis.

Remarkably, our investment in this world-changing company returned more than the average annual stock market gain over just four trading days. Despite the dramatic price increase in this extremely short investment period, we still hold Qualcomm rather than selling our position. It is our belief that Qualcomm will provide further outsized performance long term. This belief is based on two key factors: the strength of Qualcomm’s core business and the potential of its addressable market expansion.

Present-Day Qualcomm

The current circumstance that tipped us off to Qualcomm’s grand future of possibilities is their deep patent pool of semiconductor chips and their ability to protect these patents. The backbone of Qualcomm’s business is the sale of chips to Apple, Samsung, and various other smartphone manufacturers.

These chips can be divided into two groups: wireless modems, such as 3G & 4G, and application processors (primarily through their Snapdragon line). According to third-party sources, Qualcomm is the leading player in both categories.

Qualcomm Logo
A pie chart of Global Smartphone AP Market Shares by Revenue. Qualcomm leads the pack with 44%, followed by Appl with 23% and MediaTek at 22%.
Bar chart of processor revenue shares. Qualcomm towers above the rest at 55.7% for 2011, with MediaTek trailing at 27.6% and Samsung LSI at 7.4%.

Qualcomm’s chips are found abundantly in current smartphone offerings. They appear in approximately 40% of Samsung’s Galaxy S22 phones and more than 75% of the upcoming Galaxy S23 models. You can also expect to see Qualcomm’s modems in almost 100% of Apple’s upcoming iPhone 15 and iPhone 16 models.

There were two incidents, both involving Apple, that gave our team confidence in Qualcomm’s ability to not just protect their patents, but also generate a return on their investment.

In 2019, Apple settled against Qualcomm in their multi-billion-dollar lawsuit over royalties owed to Qualcomm from their patents. As a result of this settlement, Apple paid Qualcomm an undisclosed sum, and the parties negotiated a six-year license agreement.

Still eager to be in on the action, Apple then attempted to invalidate some of Qualcomm’s patents, but Qualcomm won the case again. To cement the outcome, the US Supreme Court officially declined to hear Apple’s appeal in mid-2022.

After Qualcomm’s multiple wins regarding the validity of their patent portfolio, anyone who considers developing their own modems with mobile network connectivity will need to step very carefully around Qualcomm’s over 163,000 active patents. As Apple found out, it is probably safer and easier to just use Qualcomm’s chips—at least for the near future.

A Vision of the Future

In the future, Qualcomm will likely be able to use these patents with global impact in ways we have yet to imagine. Today, Qualcomm has an addressable market of about $100 billion through several segments: premium Androids, wireless communications, automotives, and the Internet of Things.

Internet of Things (IoT) is the system of physical smart devices all interlinked by the internet. The system grows continuously as more and more everyday items become “smart,” such as watches, fridges, thermostats, etc.

We believe Qualcomm’s addressable market has the potential to expand 700%—approximately $700 billion—through the proliferation of 5G and all its downstream benefits to autonomous vehicles, artificial intelligence, cloud computing, and other emerging industries. According to an independent study from Berkeley Research Group, by 2035, organizations around the world will have evolved their business models to take full advantage of 5G.

A surface-level glance may show that 5G is nothing more than the usual improvements—higher speeds and lower latency. In mobile networks, these upgrades have happened every decade since the 1980s started with 1G. However, though this seems to be business as usual, it is precisely because of higher speeds and lower latency that the world can now take advantage of mobile networks in a way that was previously impossible. These improvements can, and have, fundamentally changed the way people live and businesses operate.

In computing, latency is the period of time between a request for a data transfer and the beginning of that transfer. If you have ever clicked a link and had to wait forever for it to load, you have experienced high latency.

Take the rollout of 4G throughout the 2010s as an example. Like previous iterations, 4G can be seen as simply a faster 3G, but this conclusion would be a gross understatement of its effects on society. 4G brought the things we used to do on a laptop or a desktop to mobile. As a result, there is now an app for almost everything: banking, photo sharing, video streaming, social media, e-commerce, etc. If you use FaceTime, Uber, Instagram, or similar apps, you have 4G to thank.

Following on the success of 4G, we believe 5G will be even more transformative to society. The mind boggles when we think about potential effects to the medical industry, emergency disaster responses, automotive safety, and more. Environmental sustainability is one use case that intrigues us in particular. Due to 5G’s low latency networks, it is possible to provide real-time monitoring and optimization to water and energy usage. This opens up doors beyond decreased app loading times and reaches into the future to affect our children and grandchildren.

Depictions of the projected potential benefits of Qualcomm's 5G on the environment, ranging from reduced greenhouse gas emissions to lower pesticide use.

The speed, accessibility, and capacity of 5G also makes it possible to connect all your devices to the cloud. These devices could then integrate with AI and share information. Some applications are already cropping up, like autonomous vehicles and shipping hubs. While it is still early days for 5G, we feel confident that its progress will benefit Qualcomm’s free cash flows.

Text reads: 5G touching all aspects of your life, even a dress. The image shows a chain of events from sustainable farming, to manufacturing and delivery all made more efficient by use of Qualcomm's 5G chips.

Source: Qualcomm

Valuation Models

Though there is a potential for a seven-fold increase in Qualcomm’s addressable market, we modelled out revenues to merely double over the next 10 years, from $39 billion to $82 billion. We believe this pessimistic forecast is appropriate because it takes into account potential delays to our 5G thesis. It also accounts for increased competition that may result from a more lucrative environment–a kind of “gold rush” scenario as we have seen so many times in the past and will likely see again in the future.

In terms of operating margins, we have baked in higher inflationary pressures through a reduction in margins, relative to historical averages. We believe these margins will recover back to historical averages over time as supply disruptions abate. Our ending margin of 29.74%, over the 10-year period, is conservatively in line with the semiconductor industry average of 31.27%.

As for capital expenditure requirements, we have modelled an approximate 200% increase–from $38 billion to $72 billion–which aligns with the doubling revenue over the 10-year period. Overall, we modelled a lower capital expenditure increase, relative to the increase in revenues, because we believe there are efficiencies that the company can exploit during their addressable market expansion. The same technology used to power smartphones can now be used to drive multiple end-use cases. We believe there is likely only a minimal amount of additional investment necessary for these extra sources of revenue.

After inputting all appropriate variables, our calculated intrinsic value for Qualcomm comes to $186.56. At a current price of $124.21 (as of writing), we believe there is further upside potential of approximately 50%.

In Conclusion…

Though the technological advancements in decades to come will be complex, we use our collective, contemporary knowledge to see their potential and find value. Qualcomm has proven themselves capable of safeguarding their patents, tussling with a tech giant and coming away victorious. And the historical pattern of success from 1G all the way to 5G tells us that any consequent innovation will have staggering effects.

Our in-house research team continues to search for undervalued companies using our multiphasic discounted cash flow methodology. These carefully crafted valuations empower us to select the most suitable companies to make our clients’ wealth matter over the long term. If you want to learn more about our research process, visit this page. You can also reach out to our team by emailing info@qubeinvest.ca or giving us a call at (780) 463-2688.

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.