So look, no beating around the bush this time; when a high-quality asset (a business in this case) goes on sale because of outside forces weighing in the past the profitable realities of such support, you should be honing into your screen and digging out the facts to make an educated investment decision.
You have decided to come to the right place, which is why MarketBeat has provided you with enough time savings on research so you can think more about buying or getting busy selling. Today, the case study falls on Qualcomm (NASDAQ: QCOM), a well-known name with a beaten-up stock price.
With a brief lesson on value investing and deal-making, you will walk away with enough information to consider the vitality of allocating some of your hard-earned dollars to this name and get yourself acquainted with this stock.
Bring in the Protein
Plain and simple, this stock is trading at a 20% discount from its 52-week high. Wall Street's definition of a bear market is just this: a 20% decline from recent (or all-time) highs, first initial check once you open up the stock chart, done.
Why has the stock been falling this much? A valid concern may start to brew questions around the stability of the business, though these can be dismissed shortly.
According to industry readings from the United States ISM manufacturing PMI reports, the computer electronics industry has been on a near twelve-month contraction. This explains the slowdowns across the entire sector, excusing some - if not all - of the financial contractions seen in Qualcomm's figures.
Bigger, more established names like Apple (NASDAQ: AAPL) have been affected by this demand downturn, as America's favorite electronics brand reported a roughly 40% decline in personal computer shipments this year.
So, things are not necessarily blowing up inside Qualcomm's headquarters; instead, the entire industry is in trouble, and stock prices are all headed down together, but does the market agree with this assumption?
Analysts have placed a consensus price target of $142.6 a share for Qualcomm stock, which directly implies a 28.0% upside from today's prices. Analysts, who live and breathe the companies they cover, would not be bullish at all if there were any real trouble.
In fact, the company's financials will reveal the platform upon which a massive deal can build momentum for tremendous growth opportunities, but more on this later; for now, focus on the following key metrics.
Gross margins have been over 55% year after year, which can be a sign of pricing power or some other form of product moat. On a net income margin basis, this rate hardly dips below 22%, an astonishing rate of profitability for any industry.
So it's a well-managed money-pumping machine, but is it good enough for your money? Some will suggest it is.
Bright Future
Making - and maintaining - good margins is only part of the game; with all the extra money lying around, management has to be efficient enough to put it in the right places. You can use the ROIC (return on invested capital) metric to dig deeper into this.
Qualcomm's ROIC has hovered around 20-30% on a five-year average basis, which is a massive rate of return enough to call even the greediest value investors out there.
All else being equal, stock prices should reflect ROIC levels in their annual appreciation over the long run, and compounding money at rates above 20% sounds good even when inflation is running wild.
Why is all of this critical, information from past performance and all? You can safely assume that any incremental dollar of revenue that comes into this business will not only retain 22% or more but that this leftover will be wisely managed.
It was time to find out where all of this additional revenue would be coming from, and it turned out to be a place most bulls had given up on, one that bears were never counting on coming back.
Qualcomm has renewed its relationship with Apple, agreeing to be the exclusive supplier of Snapdragon 5G chips for smartphones. This reiterates Qualcomm's positioning as a leader in 5G technology, a moat you cannot put a price on.
Analysts only see earnings per share jumping by 11.5% for the next twelve months, a projection that may still need to reflect the potential upside this renewed contract may bring. Remember, each dollar of additional revenue goes a long way in Qualcomm's bottom line.
Considering this massive tailwind could be reflected in the coming quarterly earnings report. The stock trading the lowest P/E multiples in more than 5 years (ex. COVID), the ducks are in a row for potential purchase in this tremendous deal.
