Qualcomm (QCOM) has had quite a run since its March 23, 2020 low and investors are right to look through what will be a less exciting 2020 than initially thought, according to one analyst.
Qualcomm is up 30% since that low, but still down for the year as earnings for 2020 have been revised lower on account of coronavirus. Semiconductor stocks have enjoyed a big run up and, like many stocks in the U.S. market, are now trading at elevated valuations on next 12 month’s earnings. Although part of the reason is lowered interest rates, investors are looking for a sharp recovery into the end of the year.
But Qualcomm now trades at 17 times 2020 earnings per share, using FactSet consensus estimates, compared to its recent average of roughly 16 times. The reason: 2021 is looking to be a strong year, especially as 5G handsets make their way through production and into the hands of users around the globe.
“Despite the near-term uncertain smartphone supply-and-demand environment, Qualcomm is well positioned to benefit from the long-term 5G investment cycle and anticipate recovering earnings in 2021 as 5G smartphones ramp, Apple reenters the model for QCT [a business segment] shipments, and global demand for smartphones improves,” wrote Canaccord Genuity analyst Michael Walkley in a note after hosting a meeting with management.
Economic activity is expected to recover in the second half of 2020, a trend currently looking much sharper in China than in the U.S. Excluding a second wave of virus outbreaks, this looks to be on track.
Walkley is looking for 5G handset volumes between 175 million and 225 million in calendar year 2020, not a far cry from previous 2020 estimates. Combined with other revenue segments, this would translate to about $20.25 billion in sales for Qualcomm.
But investors are more concerned with 2021 results and Walkley sees Qualcomm taking market share from other players in 5G chip sales in 2021, as the company is producing a powerful chip. Walkley is looking for revenue in 2021 to grow 29% to $26 billion, suggesting profit margins may expand too.
Walkley also points out that Huawei, which the White House is disallowing from buying U.S.-made chips, does not represent much revenue for Qualcomm. According to research from Alliance Bernstein analysts, Huawei only accounts for roughly 5% of global semiconductor purchases. And according to CFRA analysts, Huawei only comprises roughly 3% of Qualcomm’s revenue, allowing other revenue streams to outweigh Huawei’s impact.
Walkley has a $102 price target on Qualcomm shares, implying a 16.9 times multiple on his 2021 earnings forecast of $6.02 a share. Pre-virus, 5G-exposed chip makers were indeed trading at elevated multiples compared to their histories because the multi-year 5G ramp was expected to bring strong revenue and earnings growth. Walkley’s price target reflects 30% upside.
Risks to the thesis on Qualcomm: stronger 5G competition from other makers or another virus crisis, disabling suppliers from building and consumers from buying, although the latter argument is rebutted by the industry’s position that 5G devices would be highly beneficial during a pandemic period.