50% Jump For Qualcomm Stock With Barely Any Revenue Growth?

by Trefis Team
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Three years passed, revenue barely grew 3%, yet somehow the stock returned 50% purely from capital gains. That’s what Qualcomm (NASDAQ:QCOM) did for its shareholders! Curious how it happened? We take a systematic approach to breakdown the stock price components and examine them. Usually, increased EPS resulting from a leaner cost structure, a new product, or pricing advantage, and share buyback is the key, it wasn’t the case for Qualcomm. The company saw its EPS decrease -5.5%, driven by net margin decline from 24.2% in 2016 to 18.1% in 2019, partially offset by nearly a 19% reduction in share count. However, its P/E ratio expanded a massive 60%. This meant that despite reduced profitability, investors were betting a lot on Qualcomm’s future earnings potential. What changed? Well, Qualcomm finally settled its big licensing dispute with Apple! Our dashboard Why Qualcomm Inc stock is up 51.6% between 2016 and 2019 even though revenue increased 3.1% ? summarizes factors responsible for Qualcomm’s stock run. 

P/E Expansion Makes Sense

The dispute with Apple created uncertainty around Qualcomm’s EPS growth as it threatened a significant portion of its royalty revenue. Apple was installing Qualcomm mobile modems in its iPhone devices, and was paying Qualcomm nearly $7.50 per mobile device, after rebates. However, it wanted to bring the cost significantly down. The settlement of the dispute means that Apple will now pay north of $4.5 billion to Qualcomm and has entered into an agreement to sell Qualcomm’s chips for at least the next 4 years. With its future growth outlook revised upward, P/E expansion makes sense.

Even Reduced Profitability Is Temporary

Between 2016 and 2019, Qualcomm’s EPS decreased -5.5%. While revenue increased 3.1%, net income margin decreased -25.4% and share count decreased -18.5%. Then why aren’t investors concerned about such a sharp margin decline? There are two reasons to it. First, while comparison against 2019 makes it look pessimistic, margin has actually increased since 2017. Second, the difference between 2016 and 2019 margin is largely due to much higher effective tax rate in 2019, which was primarily due to one-time charge related to derecognition of deferred tax asset on distributed intellectual property. Excluding this incremental impact, margins would have been roughly the same. Also, if we look at some of the core operating expenses, Qualcomm has become more efficient. Its cost of revenue (as % of revenue) is down from 41.4% in 2016 to 38.6% in 2019. This gross margin improvement is largely due to settlement with Apple resulting in increased licensing revenue. Similarly, SG&A expense % has come down from 10.1% to 9%.

With the dispute with Apple settled and competitor Intel announcing its exit from the 5G mobile modem business, Qualcomm has all the power it needs. Deployment and adoption of 5G is going to be one of the important drivers for Qualcomm’s growth going forward.

Qualcomm isn’t the only tech company rewarding its shareholders despite little revenue growth. Here is another tech company that will surprise you, and reinforce how ‘agreements’ can be a critical driver of shareholder returns. Check out How Verisign managed 150% stock price growth despite little revenue growth.

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