Qualcomm Incorporated (NASDAQ: QCOM) has seen its share price decline since the start of this year as the rotation play into value stocks from technology related stocks picked up.
The decline was escalated as Russia’s invasion of Ukraine introduced uncertainty and volatility into the stock market.
In fact, Qualcomm has seen its share price drop by 17.9% year-to-date (YTD).
Following the sell down of its shares, I believe investors can now buy Qualcomm at a bargain.
Here are 5 reasons I think investors should buy Qualcomm despite the near-term volatility in the stock market.
1) Beneficiary of 5G
Qualcomm is well-positioned to benefit from the rollout of 5G, which is expected to gain traction over the next few years.
In fact, in 2021, 5G smartphones with Qualcomm chips are expected to surge by 150% year-on-year (yoy) to about 450 to 550 units.
As of now, Qualcomm chipset is a critical component to build a 5G smartphone.
This will benefit the company as the compound annual growth rate (CAGR) for the smartphone chipset industry is forecasted at 69% through 2028 by Grand View Research.
This growth rate will keep Qualcomm busy in the near-term.
2) Diversification into IoT and automotive segment will drive growth
While most investors associate Qualcomm with 5G, the company has successfully diversified away from itsreliance on its core handset market in 2021.
In fact, 38% of its revenue comes from other business segments.
Some of the key areas are automotive and Internet of Things (IoT).
I believe the rollout of 5G network globally will continue to drive growth for both of these segments.
For example, in the automotive industry, the company has recently acquired Veoneer and could integrate its Advanced Driver Assistance Solution (ADAS).
This has enhanced Qualcomm’s software capabilities in the automotive sector. While it is hard to forecast the arrival of fully autonomous vehicles, the assisted driving features are coming to more vehicles.
Qualcomm’s growing IoT business is also another area of growth for the company as it now includes robotics, smart power meters and retail tracking systems.
The powerful ecosystems that Qualcomm has for both hardware and software will give them a competitive edge in the technology sector.
3) Potential Arm CPU business growth
While Qualcomm’s CPU business is only 0.56% of its IoT segment revenue, the rise of Arm-based CPUs could offer a strong growth potential for the company.
Given the advantages that Arm-based CPUs have over the x86 architectures, I expect to see a pickup in the non-Apple Arm processors. This is as Microsoft could support greater software compatibility between Windows and Arm chips.
Currently, Apple dominates the Arm CPU market with its M1 chips with a 79% market share but with greater integration and enhancement of software compatibility on Windows with Arm chips, non-Apple Arm CPUs are expected to outpace Apple and control 63.5% of the total market share by 2025.
4) Attractive valuation
Aside from the growth story, Qualcomm’s valuation is looking more attractive following the recent sell down.
The company has experienced substantial growth in 2021 and projects this trend to continue into 2022.
At its current share price of US$150.76, it is trading at a trailing price-earning ratio (PE) of 17.2 times, which is significantly lower than the sector median PE of 25.1 times.
5) Strong dividend track record
Another reason to buy Qualcomm is the dividend yield at 1.8% based on its current share price.
This is based on cash dividend payout ratio of around 40.9%, which is higher than most technology companies.
It however remains at a comfortable level based on the company’s operating and capital expenditure.
Another indication of the safety of its dividend payout is its track record in boosting dividends.
The company has managed to boost its dividend for 19 consecutive years, which makes it one of the few technology companies that pay consistent and growing dividends.
Based on its 10-year track record, dividend growth stood at a CAGR of 12.2%.
Significant Growth Potential Outweighs Near-term Headwinds
It is almost impossible to time the bottom when it comes to investing.
I am quite sure that Qualcomm’s share price will still see near-term volatility and sell down if the Russia-Ukraine war is prolonged but the significant growth potential for Qualcomm far outweighs the near-term headwinds and uncertainties.
Advancement of cloud computing, development of seamless wireless communication, automatic cars, robotics, IoT and a shift towards digitalisation all put Qualcomm in a perfect position to grow.
The company’s technological expertise allow it to diversify away from the reliance on the mobile market as seen by its latest earnings.
At the current attractive valuation with a PE of 17.2 times, it makes sense for long-term investors to buy into Qualcomm.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
