Here’s Why Qualcomm Stock Looks Like A Better Bet Than Motorola Solutions

MSI: Motorola Solutions logo
Motorola Solutions

We think that Qualcomm (NASDAQ:QCOM) currently is a better pick compared to Motorola Solutions Inc. (NYSE:MSI). Qualcomm stock trades at about 4.9x trailing revenues, compared to around 5.5x for Motorola Solutions. Does this gap in Qualcomm’s valuation make sense? We don’t think so. While both the companies have benefited in the pandemic, with an overall increase in demand for telecommunication hardware and equipment, QCOM stock has been weighed down over the recent years, partly due to its legal dispute with Apple (which eventually did result in a settlement). However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Motorola Solutions Inc vs Qualcomm: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Qualcomm Has Seen Better Revenue Growth


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Both companies saw a drop in revenue for FY 2020 vs FY 2019, but revenues still came in higher than in FY 2018. MSI saw revenue rise from $7.3 billion in 2018 to $7.9 billion in 2019, before dropping to $7.4 billion, while QCOM’s revenues rose from $22.6 billion in 2018 to $24.3 billion in 2019, before dropping to $23.5 billion in 2020. However, QCOM’s LTM revenues are up to a stellar $32.6 billion, while MSI’s LTM revenues still stand at the FY 2020 numbers of around $7.4 billion. This is due to a surge in demand for QCOM’s 5G chipsets, as a result of the accelerated global rollout of 5G. Meanwhile, MSI, a company providing telecommunication equipment to organizations and government entities, hasn’t seen a similar jump in demand for its products. However, looking forward, now that more than half of the U.S. population is fully vaccinated for Covid-19, the overall economic activities are likely to move steadily closer to normalcy, boding well for MSI.

2. Comparable Margins

QCOM’s operating margins stood at 31.7% over the last twelve month period, reflecting a strong jump from 26.6% in FY 2020, owing to higher selling prices and volume. This compares with an operating margin of 18.6% over the last twelve month period for Motorola Solutions, at par with that seen in FY 2020.

The Net of It All

While Qualcomm’s revenue as well as customer base is much larger than Motorola Solutions, the former has also seen higher growth in revenues and operating margins. Looking at the post-Covid recovery, Qualcomm has fared better in FY 2021 so far, with LTM revenues nearly 1.4x higher than FY 2020, while Motorola’s LTM revenues stand at the same level as FY 2020. Despite this, Qualcomm has a comparatively lower P/EBIT of 15x, compared to 29x for MSI. We think this gap in valuation will eventually narrow over time to favor Qualcomm, which is more attractively priced. As such, we believe that Qualcomm is currently a better buying opportunity compared to MSI stock.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market since 2016.

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