How Qualcomm Is Putting Quality Into Its Stock /
By TIERNAN RAY
Barron's Technology Trader |
SATURDAY, JANUARY 29, 2011
Qualcomm, in the age of wireless communications, is looking like a solid investment. Also, Microsoft has plenty of factors now that could lift its shares.
The Dot-Com Era was an awful time for many reasons, among them obnoxious sock puppets and obnoxious stock prices.
I'm happy to report, however, that some things can be salvaged from that Gilded Age.
For example, last week, Qualcomm (ticker: QCOM), a former highflier that came crashing down in 2000 with all the rest, reported a very good fiscal first quarter and a buoyant outlook for this year.
Why am I reaching so far back in time? To make the point that Qualcomm is older and wiser, and a far better deal for investors.
The latest results suggest Qualcomm is a solid investment in the age of wireless communications evolving around us with startling intensity.
Qualcomm makes modem chips that manage the communications in cellphones and, soon, in wireless-enabled tablet computers. The company is a cornerstone of the new era of networked devices.
Back in dot-com days, when the stock reached an all-time, presplit price of $652, on the next-to-last day of trading in 1999, the shares fetched over 100 times forward earnings.
In what sure felt at the time like millennium gazing, PaineWebber famously slapped a $1,000 price target on the stock, a P/E multiple of 239 times projected earnings.
These days, at a recent $53.74, Qualcomm fetches a more modest 18 times projected earnings per share of $2.99 for the fiscal year ending this September, or 16.7 times next year's projected $3.21 EPS, depending on your flavor.
I think the stock can certainly gain another 20%. After seeing sales fall in 2009 during the recession, and turning in a lackluster 7% last fiscal year, analysts have the company bringing in as much as 30% revenue growth this year and 24% profit growth.
That adds up to a billion dollars more than analysts expected before last Wednesday's Q1 report. First quarter sales were up 25%, and earnings per share of 82 cents easily beat the average 72-cent estimate.
On the conference call with analysts, CEO Paul Jacobs, chiming in from Davos, rattled off some dazzling statistics: The number of smartphones sold around the world will rise 50% this year, to 440 million. Qualcomm's shipments of chips are supposed to rise 23% this year, to as many as 800 million units, and the more chips it sells into smartphones, the better, as those phones are more complex, bringing Qualcomm higher royalties and higher profit margin.
There are other opportunities as well. Adam Benjamin with Jefferies, wrote on Thursday that he expects Qualcomm will increasingly be able to sell a chip called "Snapdragon" into not just phones but also tablet computers.
Benjamin has a Buy rating on Qualcomm, and thinks it could be worth $68. Craig Berger, an analyst with FBR Capital Markets, has a more cautious $60 price target, but he also thinks it can outperform the market. On Thursday he wrote that Qualcomm is "returning to its historical traditions of solid revenue growth and conservative financial guidance."
At 16.7 times next year's earnings, Qualcomm's P/E is below its average in the last five years of 18.5 times. Moreover, Bloomberg numbers suggest the stock's P/E-to-growth ratio is at just 1.1, which would be below the average of 1.4 in the last two years.
With Qualcomm's earnings growth rate now being sharply ratcheted higher by the Street, I expect the stock multiple will have to expand to 21 to 22. That could put the shares in the vicinity of $66.
What could go wrong? Royalty rates could turn out to be less than the company estimates, a concern Berger mentions. And competition is certainly formidable. Nvidia (NVDA), which Barron's wrote positively about recently, is a chief competitor, with its parts inside some truly cool new devices, such as Motorola's Xoom tablet.
But competition is no reason to keep a good stock down. In more sober ways than was the case a decade ago, Qualcomm's got a shot at a huge market.
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MICROSOFT IS A STOCK THAT'S MUCH harder to anticipate. It's been a dog of a stock for quite a while now, not rising at all in the last twelve months, while the Nasdaq rose 23%, and underperforming the index in the last five years by quite a wide margin. As hedge fund manager Charles Clough suggests in a story on page 39, it would help if Microsoft enhanced its dividend.
But even without that, I think Microsoft is another one that could see at least 20% appreciation from here.
The company's main growth driver for years, Windows, is going through a rocky period, while its newfangled game accessory, Kinect, just came out of nowhere, stunning the electronics industry by becoming the fastest-selling product ever during the holiday season.
On Thursday, when Microsoft (MSFT) reported fiscal second quarter earnings, the "Entertainment" division of the company reported a stunning 55% jump in revenue, largely because of Kinect.
The group that sells Windows, meantime, saw a 30% drop in revenue, which is no small thing considering it makes up 25% of sales and 40% of operating profit.
The only real disappointment was consumers, whose purchases of PCs were especially slim.
And there's no longer a recession to blame. This is a major structural shift in the market.
Microsoft's director for investor relations, Bill Koefoed, told me that fewer Netbooks were sold as individuals turned to buying…something else. What that was, he wouldn't say, but it's obvious: they were buying Apple's (AAPL) iPad. Apple last week said it sold over seven million units in the December quarter, far more than analysts expected.
So, is Microsoft toast? Not at all. They're a survivor. On top of Kinect, Microsoft saw a 24% jump in revenue at its "Business" division, which sells, among other things, Microsoft Office. Sales of Office to both consumers and businesses rose 20% in the quarter.
Once you realize that Microsoft is not going away because of a little thing like the collapse in consumer PCs, it's easy to do the math on its stock.
At approximately 12 times next fiscal year's earnings, the shares trade well below a five-year average of 15 times.
Analysts are projecting the company to make $2.51 this fiscal year ending in June. That would be 19% profit growth for Microsoft, following 24% the year before. At that rate, Microsoft's low P/E isn't consistent with its earnings growth rate.
Give the stock something more like its traditional multiple, and the shares could rise to the mid-$30s. |
