Qualcomm (QCOM): Buy, Sell, or Hold Post Q2 Earnings?

Qualcomm currently trades at $160.46 per share and has shown little upside over the past six months, posting a middling return of 4.5%. The stock also fell short of the S&P 500’s 10.5% gain during that period.

Given the weaker price action, is now a good time to buy QCOM? Or should investors expect a bumpy road ahead? Find out in our full research report, it’s free.

Why Does QCOM Stock Spark Debate?

Having been at the forefront of developing the standards for cellular connectivity for over four decades, Qualcomm (NASDAQ:QCOM) is a leading innovator and a fabless manufacturer of wireless technology chips used in smartphones, autos and internet of things appliances.

Two Things to Like:

1. Skyrocketing Revenue Shows Strong Momentum

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Qualcomm grew its sales at an excellent 16.6% compounded annual growth rate. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Qualcomm has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 30.1% over the last two years.

One Reason to be Careful:

Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Qualcomm’s revenue to rise by 2.1%, a deceleration versus its 16.6% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Final Judgment

Qualcomm’s merits more than compensate for its flaws. With its shares lagging the market recently, the stock trades at 13.8× forward P/E (or $160.46 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.

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