Over the past six months, Qualcomm has been a great trade, beating the S&P 500 by 20.4%. Its stock price has climbed to $226.50, representing a healthy 29.2% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Qualcomm, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Qualcomm Not Exciting?
We’re glad investors have benefited from the price increase, but we’re cautious about Qualcomm. Here are two reasons why QCOM doesn’t excite us, plus one stock we’d rather own.
1. Revenue Projections Show Stormy Skies Ahead
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 drop by 8.8%, a decrease from its 10.1% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Qualcomm’s operating margin decreased by 7.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 25.5%.
Final Judgment
Qualcomm isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 21.8× forward P/E (or $226.50 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
Stocks We Like More Than Qualcomm
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