An undervalued technology giant

Billions, maybe trillions of times a day…

That’s how often people around the world touch something made better by Qualcomm. It could be the smartphone in your pocket, the tablet on your coffee table, that wireless modem in your briefcase… it could even be that navigation system in your car or that action camera strapped to your chest.

Who is Qualcomm, and what do they do? They are engineers, scientists and business strategists. While being headquartered in San Diego, CA the team of professionals over at Qualcomm come from many different countries and speak many different languages. The diverse cultural background allows Qualcomm to have unique perspectives. Together, they focus on a single goal—to invent breakthrough technologies that transform how the world connects, computes, and communicates.

From a business standpoint the company reports its revenue and overall operational results in two major segments: Qualcomm Code Division Multiple Access (QCT) technology and Qualcomm Technology Licensing (QTL) which accounted for 79.3% and 20.2% of the non-GAAP revenues respectively in the first fiscal quarter of 2021. It is clear that all services and products that the company offers within the QCT segment should be considered as the core business of the company. The products include CDMA-based integrated circuits (ICs) and system software for wireless voice and data communications as well as global positioning system (GPS) products.

Qualcomm is not just satisfied by simply being the global leader in the 5G chipset market at the moment, as the senior management of the company realizes that complacency equals “death” in this fast-paced industry. Qualcomm is focused on further solidifying its dominance in the space with more than 700 5G designs and series of innovative product launches planned for this year. Some of the main challenges that have hindered 5G’s wide spread adoption up until now have been related to connectivity, security, flexibility and scalability. Qualcomm has been working actively on delivering low-power resilient multi-gigabit connectivity with best-in-class security, which is inevitably going to lead to an accelerated commercialization of the 5G market by Original Equipment Manufacturers. Qualcomm was also able to secure a new global patent license agreement with Huawei, which will play a very important role in bringing in a lot of revenue for the company moving forward.

The QTL segment on the other hand reports revenues received from the licensing process of Qualcomm’s intellectual property portfolio, which consists of various patent rights used in the manufacture and sale of wireless products, including Wideband Code Division Multiple Access (WCDMA) technology solutions. Apart from receiving licensing fees the QTL segment also generates revenues from royalties based on global sales by licensees of products incorporating or using Qualcomm’s intellectual property.

Current position – Financial Performance & Future Growth Prospects

The 5G Opportunity

By being one of the leaders in the 5G space, Qualcomm’s growth, progress and future development rely to a large extent on the overall success and speed of the global transition and upgrade from the 4G onto the 5G network. With the rollout of 5G technology, Qualcomm is benefiting from investments toward building a licensing program in mobile. International statistics and polls show that for the calendar 2021, 5G handsets are expected to witness a 150% YoY growth. As we already pointed out, Qualcomm has more than 700 5G designs either already announced or in the development phase, which once again shows the readiness of the company to ride this tremendous growth wave as efficiently as possible.

Everybody from investors, scientists, users, network providers etc. knows that 5G is a synonym of the word “expensive” in this day and age as it will cost hundreds of billions of dollars to build the right infrastructure and network grid in order for the 5G network to be fully operational and efficient. The companies that will experience the financial hit from these costs the most will be the network providers like AT&T, Verizon, T-Mobile etc. as they are the ones that are supposed to build that infrastructure out. Of course, there will be government grants and financing programs in order to assist the whole process, but it will definitely be very expensive for everyone involved. This naturally resonates throughout the entire spectrum of companies involved with anything 5G related – chip manufacturers, data centers, semiconductor suppliers, phone manufacturers etc. The “expensive” 5G image has also taken a major role in the general public’s opinion and expectations regarding this new technology, as people recognize that 5G phones will be more expensive, the new 5G network plans will also be at a higher price point than the older 4G ones etc. However, Qualcomm has been trying to fight with that “expensive” narrative by building a powerful but yet cheaper 5G chip that could be used across the whole industry, thus making it a more accessible industry for the masses.

The Snapdragon 690 5G chipset is the first SoC in the 600 series to support 5G services at accessible price points. This is likely to usher in more affordable 5G Android mobile handsets, with a plethora of unique features in its category, by the second half of the year. Compared to its predecessor Snapdragon 675, the new chip is billed to offer up to 20% better central processing unit (CPU) and up to 60% faster graphics performance. The chip has an integrated Snapdragon X51 5G modem that supports global 5G standards with multi-SIM functionality and dynamic spectrum sharing. It supports a download speed of up to 2.5Gbps and upload speed of up to 660Mbps. In addition, the chipset has a new AI engine called ARCSOFT that features a Hexagon Tensor Accelerator for enhanced performance in real-time Snapchat filters and smooth transition when switching between ultra wide, wide and telephoto cameras. The chipset also significantly improves multimedia performance with the ability to record in HDR10 format for FHD+ displays with a 120Hz refresh rate and support for 4K video recording at 30fps and stills up to 192MP. Furthermore, the chip boasts a new enhancement for video encoding and supports faster charging with Quick Charge 4+. Leveraging the FastConnect 6200 system that brings Wi-Fi 6, Bluetooth 5.1 and 2×2 multi-user, multiple-input, multiple-output (MU-MIMO) configurations, the Snapdragon 690 is arguably the most powerful SoC yet in the lower mid-range segment. This augurs well for its long-term growth proposition.

The 5G Debate

Throughout the last few years there have been a lot of talks and discussions on the pros and cons of 5G, and there have been many fierce supporters on both sides of the argument. However, let’s face it – there will always be someone who has a different opinion or an opposing view regarding a certain topic, which is not necessarily a bad thing. At the end of the day the 5G network is the “natural” evolution of the 4G network and no one can or should stand in the way of technological innovation and advancement, as technology is at the heart of making the world a better, more abundant and more connected place. Furthermore, if we go back in time we will see a generally similar pattern of opposition that was present at first from the masses against every new and disruptive technology that ever came into existence.

People went crazy when the printing press was invented and some thought that this would ruin the way their lives were built and organized at the time. Then, the Industrial Revolution came in the 18-19th century, and almost everybody was worried that the “new machines” will eliminate most of the jobs in the economy and this will have a “catastrophic” implications for everybody living at the time. We can go on and on with various key inventions throughout the years like the telephone, internal combustion engine, TV, Internet, Blockchain etc., serving like examples of how generally negative the masses are at the beginning, when a new technology is introduced. The main reason as to why that is the case is because most of the individuals don’t really bother to learn the ins and outs of this new technology before judging on whether its good or bad, but rather prefer to go with the general “consensus” and the opinion of the crowd. However, we all know that none of the above-mentioned technologies “wrecked” and “destroyed” the world, but rather helped it to grow, develop, improve and generally be a better place. So, here we are again with the next revolutionary technology – 5G – and what do we have.. well, a lot of people with a negative mindset thinking that this time they will be right and the 5G network will “harm” the world in an unrecoverable manner. A favorite saying of mine states that “Intelligent people learn from their own mistakes, whereas geniuses learn from the mistakes made by others”. If we try to translate this into the 5G debate and the “new technology” controversy theme, then we would clearly see that it is not wise to go against the natural progression and evolution of the human kind, because the technological advancement lies at the heart of it.

The AI Opportunity

“The global pandemic has pushed AI to the top of the corporate agenda, empowering business resilience and relevance,” says Ritu Jyoti, program vice president for AI Research at IDC. “AI is becoming ubiquitous across all the functional areas of a business. Advancements in Machine Learning, Conversational AI, and Computer Vision AI are at the forefront of AI software innovations, architecting converged business and IT process optimizations, predictions and recommendations, and enabling transformative customer and employee experiences.”

Worldwide revenues for the artificial intelligence (AI) market, including software, hardware, and services, are forecast to grow 16.4% year over year in 2021 to $327.5 billion, according to the latest release of the International Data Corporation (IDC) Worldwide Semiannual Artificial Intelligence Tracker. By 2024, the market is expected to break the $500 billion mark with a five-year compound annual growth rate (CAGR) of 17.5% and total revenues reaching an impressive $554.3 billion.

Among the three technology categories, software represented 88% of the total AI market revenues in 2020. However, it is the slowest growing category with a five-year CAGR of 17.3%. Within the AI software category, AI Applications took the largest share of revenue at 50% in 2020. In terms of growth, the AI Software Platforms market is forecast to be the strongest with a five-year CAGR of 32.7%. The slowest will be AI System Infrastructure Software with a five-year CAGR of 13.7% while accounting for roughly 36% of AI software revenues. Within the AI Applications market, AI ERM is expected to grow slightly stronger than AI CRM over the next five years.

The AI hardware market is the smallest category with approximately 5% share of overall AI revenues in 2020. The share is forecast to increase slightly in 2021 at the expense of AI Software. The AI Server market grew faster than the AI Storage market in 2020, but these results are expected to the reverse in 2021 when AI Storage is forecast to grow 31.8% year over year compared to 26.4% for the AI Server market. By 2024, AI Hardware is forecast to be a $30.5 billion market with AI Servers representing an 82% revenue share.

“The AI server and storage markets continue to see rapid growth, providing an increasingly specialized and innovative infrastructure foundation under the entire AI landscape,” said Peter Rutten, research director, Infrastructure Systems, Platforms and Technologies at IDC.

The senior management at Qualcomm has recognized the importance of positioning the company well within this fast growing industry and Qualcomm has been working hard on possibly even gaining a leading position within one or more of the sub-divisions and sectors of this broader market. Recently, we saw Qualcomm raising the bar for driverless cars as it unveiled the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using Articial Intelligence (AI). Snapdragon’s scalable platform comprises the Snapdragon Ride Safety System-on-a-Chip (SoC), Accelerator and the Snapdragon Ride Autonomous Stack. The combination of these self-driving algorithms facilitates a robust architecture of hardware and software that supports advanced driver assistance systems like automatic emergency braking, traffic sign recognition, lane keeping, self-parking and automated highway driving technology, commonly known as Level 1 and Level 2 systems. The company’s next-generation 5G telematics and automotive designs won a pipeline of $8 billion worth of business, which will definitely further strengthen its leading market position in the connected cars segment. This is an outstanding long-term catalyst for the company. Qualcomm’s unit, Qualcomm Technologies, Inc., has acquired a chip startup — NUVIA — for a stellar valuation of $1.4 billion (excluding working capital and other adjustments). Markedly, the deal is likely to uplift Qualcomm’s position in the global 5G chipset arena on the back of NUVIA’s expertise in high-performance processors for compute-intensive devices and applications. The deal addresses the burgeoning requirements of next-gen 5G computing in the dynamic tech industry.

Financial Performance

From a financial standpoint Qualcomm reported a solid first-quarter fiscal 2021 results with record earnings, primarily driven by the increased demand for 5G-enabled chips. Both the top and bottom-line figures showed strong growth on an annual basis, mainly due to the strength of the business model and the senior management’s ability to react efficiently and effectively to the volatile and evolving market conditions.

Net Income

On a GAAP basis, throughout Q1 net income more than doubled to $2,455 million or $2.12 per share from $925 million or 80 cents per share in the prior-year quarter. The significant improvement in GAAP earnings was primarily attributable to top-line growth driven by surging demand of 5G products across handsets, along with higher automotive and IoT revenues.

Quarterly non-GAAP net income came in at $2,510 million or $2.17 per share compared with $1,151 million or 99 cents in the year-ago quarter. Undeterred by the adverse impact of the virus outbreak, record high non-GAAP earnings per share were largely driven by higher revenues across the board. The bottom line exceeded management’s guidance and beat the street’s estimate by 7 cents.

Revenues

On a GAAP basis, total revenues in the fiscal first quarter were $8,235 million compared with $5,077 million in the prior-year quarter. The radical increase in revenues was driven by 5G ramp up, higher sales to Apple Inc. and rise in automotive and IoT revenues with diligent execution of operational plans and resilient business culture acting as catalysts.

Non-GAAP revenues in the reported quarter were $8,226 million compared with $5,057 million in the year-earlier quarter. The figure missed the consensus mark of $8,316 million but was within the company’s guided range, driven by 5G strength, high-performing core chipsets and new RF front-end content.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months taking the price from the $56 level back in March, 2020 to the $166 all-time highs at the end of January, 2021. This represented an astonishing 196% gain for the stock in 10 months. However, the road to the above-mentioned all-time highs was not easy and was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. There were few10-15% corrective movements that took place in June, September, October and December, but the uptrend remained intact on all occasions. However, the strongest decline for QCOM’s stock occurred in the February-March period this year, when the stock plummeted from the $167 ATH down to the strong horizontal support at $122. The main reason for that 27% decline was the broad sector rotation that we saw in the market where capital was circling away from growth stock and into the cyclical and value oriented stocks out there. There weren’t any major company-related negative news or announcements that could justify such a drastic selloff. The important thing is that QCOM’s stock has continued to attract a lot of investors’ attention as it remains one of the leaders in the semiconductor space. The stable position that Qualcomm has obtained in this high growth segment of the market has turned the stock into a go-to choice for both small retail and large institutional investors looking to invest indirectly in powerful themes like 5G, IoT, Renewable Energy, Automation, Artificial Intelligence, Virtual Reality, Augmented Reality etc.

The stock is currently sitting at $139 per share, which is still offering a great almost 17% discount from the all-time highs. We saw that the stock found a lot of buying interest around the $122 level as it tested that support twice in the month of March – once in the beginning and once at the end of the month. The confluence of both the horizontal and diagonal support lines at that mark brought a lot of buyers back into the market and we saw the formation of a double-bottom reversal pattern on the daily chart, signaling that a strong up move was in the making. Investors saw the opportunity to buy into one of the leaders in the semiconductor space at a 27% discount and didn’t think twice about it. The recent failure of the price to break below the $122 support back in March and the subsequent sharp price appreciation could be taken as a signal for the presence of a strong bullish interest in the stock. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks.

However, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market. We expect most of the big tech names and favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLC and the XLK will be two of the best performing sectors in July. We believe that the stock market in the US is currently holding a lot of intrinsic risks – the new delta COVID-19 variant, Biden’s inability to pass all of his funding bills through Congress, the questionable US economic recovery with over 10 million unemployed at the moment, the post-Brexit economic reality for the UK and EU, the Federal Reserve tightening of the monetary policy conditions etc. we could ultimately be in for a choppy price action in the coming months. However, we see that the winners would most likely continue to win. We remain strongly bullish on the QCOM in both the short and long term and believe that any price corrections should be treated as great opportunities to buy this technology giant at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (5, 20, 50, 200 EMAs, Bollinger Bands, RSI etc.) have continued to support the current bull run. The daily RSI is about to push above 60, but it is still far from overbought territory on the daily chart, which is a great short-term indication for the presence of a strong bullish momentum, but it is also a rather bearish sign from a long-term standpoint, as it indicates that the price will most likely overextend its up move in the future, which in turn could bring back sellers and profit takers to put downward pressure on the price.

In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of QCOM as a meaningful part of the ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of QCOM through its portfolio of products and services, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we have never liked chasing stocks at their all-time highs regardless of how much we like the stock and the underlying business prospects, we would like to point out that starting a Long position at these levels would be recommended, as the current risk-reward ratio is favorable. We would advise our followers to initiate their initial positions at the current levels but to also be ready for adding more to their positions if there is a pullback down towards the $125-$130 zone. Our profit targets will be placed at $175 and $190 respectively. Any larger corrections on the stock down towards the $110-120 levels should be treated as strong buying opportunities.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals and technicals as well as other all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether QCOM is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 90% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. QCOM is the 46th largest holding of SPY with its current 0.45% weight within the ETF, which is understandable as the stock has experienced a 30% decline from its highs couple months ago. However, this should definitely not be taken as a negative for the stock, but rather as a positive, as the company is considered to be one of the most popular stocks among traders and investors and as a result of that its valuation metrics are not always the driving force behind the price movements on the stock. The stock is also the 14th largest holding of the XLK ETF with its 1.69% weight.

By looking at the daily chart, one could see a very similar movement on both the SPY and XLK, whereas the QCOM chart seems to be still in the early stages of completing the exact same pattern that we’ve seen on both the ETF charts. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in 5 months and 87% in 12 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts usually reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to QCOM and XLK, the SPY experienced a downward corrective movement in the last 2 weeks of February, 2021 that took the price down with around 3-5%. However, the uptrend resumed shortly thereafter. The ETF is currently sitting at the $431 mark after rebounding from the strong dynamic 20 EMA and 50 EMA support at $425, which also overlaps with another strong horizontal support positioned at $420. The correction back in February was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the prior 10-12 months it was more than normal to see a downward corrective movement taking place at some point. We must also note that the main reason for the above-mentioned correction was the broad sector rotation that we saw in the market where capital was circling away from growth stock and into the cyclical and value oriented stocks out there. This made some of the largest tech and growth-oriented names vulnerable in the short term, which indeed resulted in a heavy decline in the broad XLK sector. While the XLK outpaced the SPY during the correction and dropped with 10.7% in just two weeks, the XLK has quickly managed to find its ground and now once again it’s outpacing the SPY but this time to the upside, which will bring all of the leading tech companies higher as well.

The recent failure of the price to break below the $425 support on the SPY as well as the $145 support on the XLK back in the beginning of the month and the subsequent sharp price appreciation that we saw in the trading session of July 8th could be taken as a signal for the presence of a strong bullish interest in the market as a whole. This in turn confirms that the long-term uptrend has resumed and that the current bullish run will most likely take the price to new all-time highs in the coming weeks. Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market.

We expect most of the big tech names as well as other market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLK will be one of the best performing sector ETFs in July. We are bullish on XLK, SPY and QCOM in the short term but remain cautios in our long-term projections. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have recently made a meaningful push higher after retracing from overbought conditions throughout. The daily RSI has already pushed above 60, and it is slowly climbing towards overbought territory on the daily chart, which is a great short-term indication for the presence of a strong bullish momentum, but it is also a rather bearish sign from a long-term standpoint, as it indicates that the price will most likely overextend its up move in the future, which in turn could bring back sellers and profit takers to put downward pressure on the price.

In addition to that, it is important to note the fact that the XLK and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of XLK, SPY and QCOM as these investment vehicles are very closely correlated.

Acknowledging the fact that we have never liked chasing stocks and ETFs at their all-time highs regardless of how much we like the stock and the underlying business prospects, we would like to point out that starting a Long XLK or SPY position at these levels would not be recommended, as the current risk-reward ratio is unfavorable, due to the fact that both of the ETFs are sitting at their all-time high levels. However, we would advise our followers to initiate their Long QCOM positions at the current levels but to also be ready for adding more to their positions if there is a pullback down towards the $125-$130 zone. Our profit targets will be placed at $175 and $190 respectively. Any larger corrections on the stock down towards the $110-120 levels should be treated as strong buying opportunities.

Sincerely,

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