What Do Qualcomm’s Price Ratios Say about Its Valuation?
Qualcomm trades near a 52-week low
Qualcomm’s (QCOM) stock price isn’t sensitive to the market’s movements. Even aggressive purchases by investors brought just a 3.8% rise in the stock’s price in ten days. Qualcomm is currently trading at $56, close to its 52-week low of $50.84. The stock has a 52-week high of $71.62.
On the other hand, Broadcom’s (AVGO) and NXP Semiconductors’ (NXPI) stocks are trading at $237.66 and $107.27, near their 52-week highs. Let’s look at these companies’ stock prices and see whether their prices justify their earnings.
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A company’s PS (price-to-sales) multiple tells us what investors are willing to pay for every dollar of its sales. Qualcomm had a PS multiple of 3.57x on May 18, 2017. This metric was lower than Broadcom’s and NXP’s PS multiples of 6.11x and 3.91x, respectively.
A company’s EBIDTA (earnings before interest, tax, depreciation, and amortization) reflects the outcome of its operating decisions. It removes the effect of any financial decisions in the form of interest paid on debt, government decisions in the form of tax rates, and accounting decisions in the form of treating non-cash items like depreciation and amortization.
Qualcomm’s price-to-EBITDA multiple stood at 10.08x on May 18, 2017. This metric was much higher than NXP’s 10.53x but lower than Broadcom’s 20.70x.
A company’s price-to-FCF (free cash flow) multiple tells us what investors are willing to pay for every dollar of its free cash flow. Free cash flow is the cash available to the company after we remove its capital expenditure from the equation. It’s the free cash that the company may either return to its shareholders in the form of dividends and share buybacks or reinvest in its business for future growth opportunities.
Qualcomm has reduced its share buybacks. It’s looking to reinvest in its business in the form of its acquisition of NXP Semiconductors.
Qualcomm’s price-to-FCF multiple stood at 33.83x on May 18, 2017. This metric was higher than NXP’s 18.68x but lower than Broadcom’s 41.06x. The high multiple indicates that the company’s future FCFs are likely to fall.
Overall, investors are slightly bearish about Qualcomm’s earnings compared to Broadcom’s. However, the stock should have long-term growth potential when its regulatory and legal headwinds clear.