Qualcomm's recent strong earnings growth is unlikely to boost valuation

QCOM Shares Jumped After Profits Drop in Early November
Stocks have significantly lagged semi-industrial over the past 12 months
The company is poised for substantial growth in automotive applications
Wall Street's Consensus Outlook Is Bullish
Market-implied outlook for 2022 is moderately bearish

Qualcomm (NASDAQ:) is a major supplier of semiconductor chips and related software and services, primarily for mobile computing and communications. The company positions itself as a leader in high-growth applications in the automotive industry (through the company's Digital Chassis offerings), virtual reality/augmented reality and the Internet of Things (IoT). General Motors (NYSE) 🙂 just announced that it will use QCOM technology for its new hands-free driver assistance offering. QCOM is building on a strong foothold with its wildly successful Snapdragon chipsets for mobile computing and communications. QCOM spent most of 2021 below January highs and rocketed after strong for FY 2021 Q4, reported Nov. 3. Even with the big gains, QCOM's total return over the past year is significantly lower than the semiconductor industry's in the past 12 months.

While the 3-year performance is in line with the industry, the 5 – and 10-year annualized total returns significantly behind.

QCOM Trailing Total Returns vs. Semiconductor Industry and Total US Equity Market

Source: Morningstar

QCOM has outperformed analysts' EPS expectations for several quarters, outperforming by double digits (on a percentage basis) for the last 3 quarters. The consensus forecast for earnings per share for the first quarter of 2022 is significantly ahead of the fourth quarter results.

If the growth outlook holds, QCOM looks reasonably priced at current levels. The P/E ratio is slightly lower than early March (16.9% today versus 17.7% then), when the shares traded at $129.

QCOM Trailing and Estimated Future Quarterly EPS

Source: e-commerce. White values ??for past quarters are the reported EPS and green values ??are the amount by which this value exceeded the consensus expected level. Rather than trying to provide my own bottom-up evaluation for QCOM, I rely on two forms of consensus view. The first is the well-known Wall Street analyst consensus assessment and the 12-month price target. The second is the market implied outlook, a probabilistic price return forecast that represents the consensus outlook of buyers and sellers of options on QCOM. that between now and when the option expires, the stock price will rise above a certain level (the strike price) (call option) or fall below (put option). By analyzing the prices of call and put options on a series of strikes, all with the same expiration date, it is possible to calculate the probability of the series of possible price returns reconciling option prices. These are the market implied outlook.

When I last analyzed QCOM, on March 8, 2021, the stock was trading at $129. Wall Street's 12-month consensus price target at the time was about 30% above the stock price and the consensus rating was bullish . The market-implied outlook to January 21, 2022 was bearish, with expected volatility of 39% (year-on-year). rating neutral. Since that analysis, QCOM has achieved a total return of 39.3%, almost twice the return of the .

With ten months since my last analysis and QCOM almost 40% more expensive, I have updated the market implied outlook for QCOM for comparison with Wall Street's current consensus outlook. who have published their opinions in the last 90 days. The consensus score for QCOM is bullish and the consensus price target for 12 months is 12.49% above the current share price. Of these 21 analysts, 12 are awarding a buy recommendation and 9 are rating QCOM on hold. ]Investing.com calculates Wall Street's consensus outlook by combining the views of 35 analysts. The consensus rating is bullish and the 12-month consensus price target is 16.32% above the current share price. As with E-Trade's analyst cohort, none of the individual analysts rated below neutral.

The version of the Wall Street consensus from E-Trade and Investing.com is very similar, with an overall bullish rating and a 12-month price target of 12.5% ??to 16.3% above the current price (average 14.4%). Combined with the 1.5% dividend yield, the consensus for a 12-month total return is about 15.9%. This is slightly below QCOM's total return for 2021 and well below its lagging 3- and 5-year annualized returns. Whether the consensus outlook for total return is attractive depends on how risky the next year looks, a topic I cover in the next section. the market-implied outlook for QCOM for the period of 5.2 months from now to June 17, 2022 and for the period of 12.3 months from now to January 20, 2023, using options prices expiring on these two dates. ]

The standard presentation of the market implied outlook is in the form of a probability distribution of price returns, with probabilities on the vertical axis and price returns on the horizontal. ]

Source: Author's calculations using options quotes from E-Trade

Comparable odds of positive and negative returns of the same magnitude, although maximum odds slightly favor negative price returns.

The peak probability corresponds to a price return of -4%. The annualized volatility calculated from this distribution is 42.7%. This level of volatility is quite close to the value of the market-implied outlook in March 2021. To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative returns side of the distribution along the vertical axis (see below chart). The negative return side of the distribution is rotated about the vertical axis.

This view shows that the probabilities of negative returns are consistently, albeit slightly, increased over the probabilities of positive returns of the same magnitude (the red dotted line is above the solid blue line). On the face of it, this seems to point to a bearish outlook, but we expect that market-implied outlook may have a negative bias. Since investors are generally expected to be risk averse, they are likely to pay more than fair value for downside protection (put options). This, in turn, would create a negative bias in the market implied outlook. As such, this market implied outlook for QCOM is best interpreted as neutral.

If we look to 2022 and calculate the market implied outlook using options expiring January 20, 2023, the outlook is more bearish. The spread in opportunities to favor negative returns is more pronounced (the red dotted line is further above the solid blue line). -implied outlook, the tendency to favor negative returns is now great enough that I interpret it as bearish. That said, the apparent bearish tilt is significantly less pronounced than it was in March. The annualized volatility calculated from this distribution is 39.6%, almost identical to the value I calculated in March. Author's calculations using options quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis.

The market implied outlook is neutral through mid-2022 and somewhat bearish for the full year. Expected volatility is fairly stable at around 40% (year-on-year).


QCOM has successfully grown EPS in recent years. The quality outlook for the company is positive, with hardware and software powering more and more autonomous vehicles. In addition, the company has a strong position in mobile processors.

That said, QCOM has significantly underperformed the semiconductor industry over the past 12 months, indicating that the market is concerned about the forward-looking value proposition. The Wall Street consensus score for QCOM is bullish and the 12 month consensus price target implies a 15.9% total return. However, with expected volatility of 40%, 15.9% in return is not very attractive. As a rule of thumb for a purchase I want to see a 12 month expected return that is at least half of the expected volatility and QCOM is not quite reaching this level. mid-2022 and moderately bearish for the full year. With the stock trading near their all-time high, I'm maintaining my neutral rating on QCOM. One caveat is that I underestimated the company in my last analysis using the same approach.

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