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Qualcomm analysis: Is the tech growth giant really the perfect dividend choice?

Charles Sainsbury
16. 4. 2023
6 min read

Big tech giants tend to be in the sights of investors mainly because of their growth potential. But what if there is one that has the potential to become a long-term stable dividend company?

A basic overview

Qualcomm $QCOM+1.6% is an American company that designs and manufactures wireless telecommunications chips and software. It was founded in 1985 in San Diego, California. Qualcomm's main business is the development and sale of CDMA (Code Division Multiple Access) technologies, which are technologies for wireless voice and data transmission. Qualcomm not only develops these technologies but also sells them to companies around the world through licenses.

Qualcomm is one of the leaders in the mobile chipset market and supplies its chips to almost all major mobile phone manufacturers such as Samsung, Apple, Xiaomi and Nokia. But in addition to chipsets, Qualcomm also develops mobile operating systems, especially for Android products. Its other areas of activity include wireless charging, V2X communications for autonomous vehicles and virtual reality.

Qualcomm is considered one of the most innovative companies today. It invests tens of billions of dollars a year in research and development, focuses on the most cutting-edge technologies and strives to set trends in the mobile and connectivity industry.

Sector

Qualcomm operates in the semiconductor and chip sector for mobile devices. This is a very dynamic sector driven by the demand for smartphones, tablets and other portable devices. This sector has seen rapid growth in recent years, but growth is now slowing slightly due to the saturation of the market with smartphones. Despite this, it is a sector with great potential for the future.

Several major trends are driving the sector.

Transition to 5G networks: 5G networks will enable faster connection speeds and lower latency. This will lead to the proliferation of the Internet of Things, virtual reality and other technologies that depend on fast connections. Qualcomm is one of the leaders in 5G chipset development.

Artificial intelligence: Chipsets must power increasingly smart features such as artificial intelligence, machine learning and augmented reality. Qualcomm is integrating AI features into its latest chip platforms.

Security: chipsets must be able to handle increasing amounts of sensitive data, biometrics and digital keys. Security is therefore a key element of new chip platforms.

Virtual and augmented reality: Specialised chips power virtual and augmented reality headsets. Qualcomm is one of the leaders in developing chips for VR/AR devices.

Competition

Qualcomm faces intense competition from a number of mobile chip and semiconductor companies. It has several major competitors.

MediaTek is a Taiwanese company specializing in the development and manufacture of mobile chipsets and other semiconductors. MediaTek focuses primarily on chipsets for mid-range and lower-end smartphones, which it dominates. Its chipsets are not as powerful as Qualcomm's, but they are cheaper, making them attractive to manufacturers with limited budgets. MediaTek is Qualcomm's main competitor in emerging markets.

Samsung is the world's leading consumer electronics and semiconductor manufacturer. Samsung designs and manufactures its own chipsets for its smartphones and tablets, which compete directly with Qualcomm. While Samsung's Exynos chipsets are not as powerful as Qualcomm's Snapdragons, Samsung integrates them into its devices, which limits the space for Qualcomm.

Huawei is a Chinese company that is the world's dominant supplier of telecommunications networks and infrastructure. Huawei also designs its own Kirin chipsets for its smartphones that compete with Qualcomm. Huawei has stepped up significantly in recent years and its Kirin chipsets are getting up to the level of Snapdragons. Huawei poses a significant threat to Qualcomm especially in emerging markets.

Intel $INTC-1.1% and AMD $AMD-1.0% are the dominant processor manufacturers for PCs and servers. More recently, they have been trying to make inroads in the mobile chip market, which poses a threat to Qualcomm's position. Their mobile chipsets have not been very successful so far, but both Intel and AMD have the potential to seriously threaten Qualcomm in the future.

Competition in the mobile chip sector is therefore huge and represents one of the biggest challenges for Qualcomm in the future. It needs to constantly innovate and improve its technology to maintain its market leadership.

Current situation

Qualcomm's growth profile appears very attractive at first sight. In reality, however, Qualcomm is one of the largest publicly traded semiconductor companies with total revenues of USD 43 billion.

Thus, QCOM is now much closer to being considered a mature company as opposed to a fast-growing technology brand. So- could this be a hidden dividend treasure?

Indeed, the 9.2% revenue growth outlook is far from low, but given the rapid shift towards digital in recent years, it is far more likely that QCOM's organic revenue growth will be below this figure in the coming years than exceeding it.

EPS is growing and is expected to continue to grow. Source

At the same time, QCOM as a stock doesn't offer all that attractive capital appreciation over time. Therefore, the management is now focusing on dividend growth to attract investors. The 6.67% increase is a testament to that.

A yield of 2.59% may already be attractive to many investors
Qualcomm's dividend has been growing for quite some time now. Source

After the recent dividend increase, it appears that Qualcomm stock could be an attractive dividend growth opportunity. Although the current yield is among the higher ones within the industry and the dividend payout seems safe, I still have a hard time considering QCOM an attractive dividend stock.

In the first quarter of 2023, earnings were $2.24 billion, compared to $3.4 billion in the same period the previous year. Operating cash grew from $3.9 billion in 2018 to $9.1 billion in 2022, representing a five-year CAGR of 18.47%. In the first quarter of 2023, operating cash was $3.1 billion compared to $2.1 billion in the same period of the previous year.

Qualcomm's free cash flow (FCF) increased from $3.12 billion in 2018 to $6.83 billion in 2022, representing a 5-year CAGR of 16.96%. The company generated FCF of $29.4 billion during the five-year period, representing approximately 23% of its market capitalization. Return on invested capital has increased from 4.8% in 2018 to 45.8% in 2022.

Qualcomm may be struggling and its management may face a long-term dilemma, but its higher profitability allows it to pour more money into supporting innovation and build long-term value at a higher rate than its competitors. The company invested 19% of its revenue in R&D spending in 2022 and 21% in 2021.

Over the long term, a company's success depends on its ability to drive innovation and its profitability, and R&D spending gives it the ability to innovate and increases the likelihood of a higher future valuation. Investors should view Qualcomm as a long-term bet, but they should also be prepared for bad times.

What do you think? Will Qualcomm be a great, stable and proven dividend company someday?

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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