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What is Fair Value for QCOM?

By Matt McCallApr 08, 2018


There are several different ways to value a company, but not everyone always agrees on the same one. That’s what leads to day-to-day volatility. Some analysts will consider a stock a great value while others will think it’s overvalued. It’s not always easy to be on the right side of the investment, and for a company like Qualcomm (QCOM) it’s even more difficult.

QCOM is a world leader in the next generation of mobile technologies, and it’s been in the headlines recently as a result of Broadcom’s (AVGO) failed takeover attempt of it. Also clouding its potential valuation is management’s recent purchase of NXP Semiconductor (NXPI) – I’m just as confused as you are and nobody knows for sure how all of this will play out at the end of the day, but these are exactly the kinds of outside factors that create an even bigger divide among investors when it comes to the true value of a company.

It Boils Down to Fundamentals

So let’s dig into it a little bit more. We can start by looking at QCOM’s fundamentals and how much money it is bringing in on an annual basis. The current consensus is for the company to earn $3.40 a share in fiscal 2018 and $3.76 a share in 2019, which would be an increase of just over 10%. Based on these estimates, the stock is trading at 16X 2018 earnings, roughly in line with the S&P 500’s multiple. The 10% bottom-line growth expectations are also similar to the broader index.

That brings us to the following question – based on those similar fundamental metrics, would you rather own the entire S&P 500 or just a simple position in QCOM?

There is no doubt that there is less risk in owning a piece of 500 of the country’s largest companies as opposed to an individual stock. But on the flip side there is a lot more upside potential in a single stock than there is in a broad index. Realistically, QCOM could retest resistance at $70 in the next 12 months. The odds of the market rallying 30% over the next year are slim.

There is also the possibility of another company making an offer to buy QCOM, and this time it could be successful. Or, the company coud go on a spending spree of its own and purchase some of its smaller peers.

There are certainly a lot of unknowns here, which makes it very difficult to put a future valuation on the stock. I do see it retesting resistance sometime in the next year, so $70 would be my 12-month price target. At the same time, though, QCOM has assets that other companies not only want but need. Therefore, it is likely that someone will swoop in with an aggressive takeover bid.

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