Recommendation: Buy Qualcomm Inc.

Transcription

1 Company Description Qualcomm is a semiconductor company which produces wireless communication chips for mobile devices. It belongs to the information technology sector and the telecommunications equipment subsector of S&P 500. The company has two major segments; one active in designing and developing of new devices and the other licensing of the developed products. Thus, more than 77% of the firm s revenue is from loyalties of the licensed patents. Unlike many other semiconductor companies, such as Intel, Qualcomm does not have production facilities, so called fabs, and therefore is dependent on the third parties for manufacturing of its developed devices. Investment Thesis Based upon my macroeconomic analysis, IT sector has a promising short term and mid-term performance in the stock market. Qualcomm has had a healthy revenue growth of 30% to 40% which is anticipated to be 5-10% in the next two years. The company has consistently maintained its dominance in the market. My evaluation reveals a total return of above 9% by owning the stock. Qualcomm s stock is also undervalued compared with the sector and S&P 500 index. Therefore, I recommend BUY for this stock. Recommendation Risks Although my recommendation is BUY for this stock, I also foresee risks associated with the company s future earnings and therefore its stock performance. Legal challenges remain a major source of concern for the company. In January 2015, the firm paid close to $1Bn fine to the Chinese government for business irregularities. There are, however, other legal suits in China, South Korea and Europe that the company may face in near future. In addition, since the firm has no production facility, it is mainly dependent on the revenues generated by its R&D activities. A significant portion of the revenue is sourced to 2-3 customers. Any changes in the competitive landscape affecting the customers will significantly hamper revenue generation for the firm. Recommendation: Buy Qualcomm Inc. Date: 4 April 2015 Current Price: $67.97 Target Price: $72.37 Total Return: 9.29% Ticker: QCOM Market Cap.: $112.12Bn Dividend Yield: 2.82% Shares Outstanding: 1.65Bn 52-Week Price Range: $ $62.46 Trailing P/E= Forward P/E= P/Book= 2.96 P/Sales= 4.25 ONE YEAR PRICE Analyst: Mehdi Mirsaneh, Mirsaneh.1@osu.edu 4 April 2015

2 Table of Contents COMPANY OVERVIEW... 3 Business Segments... 3 Competitive Landscape and Current Challenges... 4 Qualcomm s Sustained Competitive Advantage... 5 Recent Important News and Events... 5 INVESTMENT THESES... 6 Economic Analysis... 6 Key Industrial Drivers... 7 Financial Analysis and DCF Model... 8 Valuation Analysis RISKS SUMMARY AND CONCLUDING REMARKS BIBLIOGRAPHY APPENDIX 1: INCOME STATEMENT FORECAST- PART APPENDIX 2: INCOME STATEMENT FORECAST-PART APPENDIX 3: DCF MODEL APPENDIX 4: SENSITIVITY ANALYSIS OF VALUATION... 20

3 COMPANY OVERVIEW Qualcomm is a semiconductor firm active in the design and development of chip-based devices for wireless applications. Formed in 1985 by seven industry veterans, Qualcomm Communications landed its first contract in the same year with the US army to work on secure communications. In 1988, Qualcomm launched a satellite tracking system to track truck fleets for transportation industry. In the following years, Qualcomm established itself in the wireless communication systems by developing new multi-transmitter systems which use a single channel for wireless communications, creating a path for the application of GPS technology for commercial use. In 1991, Qualcomm became a public company by conducting its IPO on NASDAQ. During the past 24 years, Qualcomm s main business activity had been in the research and development of variety chipset designs, chiefly for wireless communications. Its designs have been employed by the main wireless communication device manufacturers, including Samsung and Apple to incorporate variety of communication technologies, including GPS, Voice, WiFi, Bluetooth etc., in smart phones. In simple terms, Qualcomm s designs are applied using semiconductor manufacturing processes in fabrication plants (also called fabs or foundries). However, Qualcomm is a fabless firm; that is, it has no fabrication plants. Thus, the main activity of Qualcomm is the research and development of new designs, followed by licensing them to third parties that own fabrication plants. This business model has some advantages and disadvantages which will be addressed in the following sections. Business Segments Qualcomm business is mainly composed of two major units: 1- Qualcomm CDMA Technologies (QCT), which owns the R&D, products and services including the semiconductor services, and covers all product development activities. 2- Qualcomm Licensing business (QTL), which owns the majority of the company s patent portfolio, and covers all licensing activities of the company. QCT is the backbone of the business. In fact, the income from QTL does not materialize without the products developed at the QCT business. QTL licenses the technologies which are developed by the QCT. QCT also directly involves in production and sales in cooperation with partners (as explained in the previous section) and has a larger value of sales compared with QTL, see below graphs. However, the largest earning is attributed to COMPANY OVERVIEW 3

4 the QTL, since the segment s activities are only licensing which incur almost no costs. Sales Comp Annual Growth Rate Earnings Competitive Landscape and Current Challenges The huge increase in the usage of mobile devices including cell phones and tablets has been the main driver of growth for semiconductor industry. As shown in the below graphs, in 2012, mobile devices accounted for 62% of the total semiconductor market. While the total market for semiconductor industry is expected to grow to $380Bn, wireless communication applications are anticipated to have the largest growth (~11%), accounting for 32% of the market (~$120Bn) [1]. However, there are challenges facing the firms within the industry including Qualcomm. The foundries, or fabs, are extremely expensive (around $4Bn) to build and have high fixed costs. Therefore, only firms with a huge market can set up and run the facilities. Alternatively, there are firms which only manufacture (mainly located in Taiwan and China) devices, licensing designs from fabless firms such as Qualcomm. Intel, the giant semiconductor manufacturer, and Samsung are the rare firms which are vertically integrated into design and have foundries. The consolidation of COMPANY OVERVIEW 4

5 manufacturing within few fab-based firms and the mobile device customers in mainly two firms (Apple and Samsung) have created limited maneuver space for fabless firms. Therefore, companies such as Qualcomm are facing the challenge of competition to sell designs to Apple and Samsung and at the same time encountering little bargaining power over foundries, reducing their profit margin significantly. Moreover, R&D activities are generally associated with high initial costs. The risk for a firm like Qualcomm, therefore, is that the developed designs fail to grasp the attention of the big players/customers (Apple and Samsung) in the field, resulting in a huge sunk cost for the company. Moreover, the company is facing antitrust government investigation which could cost the enterprise billions of dollars. This challenge will be addressed in more detail in the Recent Important News and Events section. Qualcomm s Sustained Competitive Advantage [2] As previously mentioned, there are challenges facing a fabless firm like Qualcomm, but it is vital to note that Qualcomm has some competitive advantages which seem to sustain for foreseeable future. Qualcomm s main advantage is its vast portfolio of intellectual property which covers the multi-channel communications (transmitting variety of data including voice, video and text over the same band, also described as 3G/4G technologies). Qualcomm currently collects $7 loyalty fee from each smart phone sold globally and this will soon grow dramatically. Presently, only 20% of all cell phones sold globally are smart phones (work on 3G/$G technologies). This figure is expected to grow fast within the next few years, creating almost one way profit generating path for Qualcomm. In addition, Qualcomm intelligently has used this advantage to form a monopoly in the market as its all other designs are integrated into the original platform which is covered by its intellectual property, making the customers dependent on Qualcomm wireless devices. Therefore, it appears that a mixture of intellectual property and design integration along with huge investment in R&D are Qualcomm s competitive advantages which are anticipated to be sustainable for years to come. Recent Important News and Events The most important news has been settling the Chines antitrust government investigation in the early days of January Qualcomm was under investigation for the market monopoly in China as a result of competitors protest. Following few months of investigation, Qualcomm eventually settled the dispute by paying close to $1Bn fine to the Chinese government. Although this was positive news, it appeared that the antitrust woes are far from over, as the South Korean government also COMPANY OVERVIEW 5

6 announced that it was looking in a similar pattern of activities in Korea. This was in addition to other news that the US and European governments had also initiated similar investigations [3]. Although, none of the other investigations have shown any sign of misconduct, the presence of such negative news around the firm affects the performance of Qualcomm stocks in the market. positive performance, as expected. Thus, I expect that the IT sector will have a promising near term stock performance. INVESTMENT THESES Economic Analysis The technology sector has a cyclical pattern which closely follows the overall economic trend of the country. Since many companies in the IT sector manufacture consumer products, it is possible to predict the earning trend in the sector by evaluating the consumer spending pattern. Figure below [4] reveals the personal savings and household net worth simultaneously, revealing that the personal savings increases (or spending decreases) when the household net worth increases. There are many factors affecting household net worth, including employment, household expectation of future income growth, housing prices etc. Looking at the net worth trend and the aforementioned parameters which are affecting it, I anticipate that the consumer spending increases within the next 12 to 18 months. As the sector s earning grows, the stock will have a Following the 2008 financial crisis, we observed government interference to limit the crisis using different strategies including decreasing the interest rate to almost zero%. However, it is expected that the Fed will soon increase interest rates. Table below [5] shows the expected effect of interest rise on different sectors, indicating that the technology sector is predicted to have the highest positive performance as a result of the interest rate rise. INVESTMENT THESES 6

7 Since Qualcomm is a member of the Communications Equipment subsector of the IT sector, it is also important to assess the performance of this subsector against the IT sector and the S&P 500, below figure. It is evident that the subsector s performance has been consistently underperformed the sector, indicating that the performance gap between the sector and subsector may increase in near future (sign of further underperformance). portable devices and their production and sales would be the main driver for the Qualcomm s revenues. Below graphs show various smart device usage forecast till 2016 for different applications and regions, indicating a significant growth, especially in smart phones and in Asia-Pacific [6]. Therefore, it is anticipated a steady market growth for Qualcomm s CDMA based platform products which support data voice -video communications used in the aforementioned devices. Key Industrial Drivers Smart Phone Usage As explained above, one of the major applications of Qualcomm s products is in multi-channel communication of voice and data simultaneously, in particular in portable devices such as smart phones, Tablets etc. Thus, it is apparent that the usage of smart 3G/4G Third and fourth generation (3G & 4G) cell phones have been a key driver of the growth in INVESTMENT THESES 7

8 the usage of smart phones. As of 2014, there have been 2.8Bn devices based on these technologies which are expected to grow to 5Bn by Presently, the CDMA design is the superior product in the market and has the largest market share. Therefore, providing CDMA remains the best choice in the market, Qualcomm s revenue is expected to grow. Internet of Things The Internet of Things is a concept in which different smart devices are connected with each other through internet, creating a new market for wireless connecting devices. Qualcomm s designs and products have put the firm in a strategic position to take advantage of this huge market which is expected to reach ~$41Bn by 2020 [7], see below graph. It appears that Qualcomm has already taken the steps to dominate this market by developing new wireless communication devices for healthcare and auto industry [8]. Other Players Another key driver for Qualcomm s revenue is the fact that whether its products remain the customers choice of design in future. Recently, Intel has started to develop similar products which could significantly challenge Qualcomm s sales in future. Samsung, itself a device designer, may introduce new products which can outclass Qualcomm designs, leading to the loss of product dominance by company. Financial Analysis and DCF Model Revenues As shown in Appendix 1 also in below table, my revenue projection is in line with the analysts consensus. Looking at the historical revenues below graph, apart from 2011 to 2013 when there was a large increase in the growth rate (likely due to the after-recession effect), the growth had been between 5-6%. Therefore, I chose a 5.5% growth rate and decreased it to 4~% to highlight the fact that the growth will most likely approaches to the nominal GDP growth of 4% in coming years. While the growth between 2011 and 2013 was 30% - 40%, it is vital to note that it is unlikely that the firm could realize such a large revenue growth within the next few years. INVESTMENT THESES 8

9 Revenue the positive impact of the legal resolution in China on the revenue growth of this segment needs to be seen. The fact that the growth in revenue in the QTL segment has been flat is alarming, since this segment contributes a much larger profit margin to the firm s income. Revenue My Projection Analysts Consensus 2015 $27,948m $27,194m 2016 $29,503m $28,476m According to the firm fillings [9], China, South Korea and China comprised 50%, 23% and 11% of revenue generations, respectively, majority of which through loyalties of licensed designs. Although, Chinese market growth seems promising, Qualcomm s legal challenges in the country may hamper its future growth; see the risk section. As noted in the SEC fillings of the firm [9], there are two main segments which are the source of revenue generation; i.e. equipmentservices and licensing. Equipment and services is the larger source and expected to growth at a larger pace compared with the licensing section. In 2014, equipment and services revenues, which were mostly related to sales of MSM and accompanying RF and PM integrated circuits, were $18.43Bn, forming almost 99% of QCT segment revenue. The QTL section, however, generated only $7.6Bn in 2014 and was mainly flat. The firm attributed the low growth rate in this segment to the under-reported royalty fees from licensees, in particular in China where the huge legal battle has undermined the firm operation. Indeed, Gross Profit Below figure shows my projection of gross profit against the analysts consensus, highlighting that my gross profit projection for 2015 and 2016 was slightly higher than the analysts. Gross Profit My Projection Analysts Consensus 2015 $17,607m $15,950m 2016 $19,177m $17,061m Although the main reason behind this difference will be revealed when the relevant costs are discussed, I would like to mention one key point here. As stated above my revenue projection was closely following the analysts, INVESTMENT THESES 9

10 and therefore, the main reason behind the difference should be associated with the costs projection. This could be, alternatively, seen in the gross profit margin as shown in the below table, revealing a higher estimation of profit margins in my projection, in contrast to the analysts. anticipate that the cost of equipment and services remain flat, in contrast with the consensus projection of growth for these costs, below table. Cost of Eq. & Services My Projection Analysts Consensus 2015 $10,341m $11,243m Gross Profit Margin My Projection Analysts Consensus 2016 $10,326m $11,415m % 58.7% % 59.9% As discussed previously, QTL segment has higher profit margin and one may logically contribute the differences to the QTL s projection. However, since the QTL has a negligible cost, as it is only a licensing unit, I believe the main differentiating source is the projection of the QCT s revenue. Cost of Equipment and Services The majority of the cost of equipment and services is associated with the QCT business unit, as the QTL has no significant costs, as described before, due to its business activity which is merely licensing of designs. According to the SEC filing of the firm in 2014 [9], the cost of equipment and services also includes the cost of shipping and handling. Due to the economic downturn in the rest of world and low energy costs as well as labor costs, I Research and Development Rapid technological changes in the wireless communication industry demands huge investment in the research and development for firms which intend to remain competitive within the sector. Looking at the financial statement of the firm, Qualcomm has increased its investment in R&D significantly, ~83% increase from 2011, signaling that it has prepared itself for the fierce competition in future. Thus, I predict that this investment will result in higher revenues in the next 3 to 5 years. Increased investment in R&D helps Qualcomm maintain its leadership position in its flagship designs in the LTE baseband market which the firm currently holds ~95% of market share [7]. Selling, General and Administrative (SG&A) Costs As revealed in the income statement of the company, SG&A is the third largest cost, INVESTMENT THESES 10

11 forming ~12% of the total costs. According to the firm s SEC filing, SG&A includes legal costs (~2.6%), share-based compensation (2.3%) and marketing and employee compensation costs. During 2014, firm has encountered higher employee and marketing expenses, leading to higher SG&A costs. The $56m increase in marketing expenses seems to be in line with the firm s attempt to maintain its market share, a positive move which should translate into higher revenues in future. Earnings Per Share (EPS) Based on my evaluation, I expect that the firm s EPS to grow at 7-9% annually in the next two years, reaching $5.31. This is consistent with some analysts forecast which indicated an EPS of $5.44 in 2016 [10], below table. Earnings Per Share My Projection Analysts Consensus 2015 $4.96 $ $5.31 $5.44 However, some other analysts had a slightly different projection, in particular for 2015 [11]. They forecast EPS of $3.5 to $4.75 for 2015, which is smaller than my and Bloomberg analysts expectations. This could be due to a different projection of revenues for the coming year, attributed to difficulties and risks in China. However, as explained previously, this risk has been almost eliminated by the new legal settlement agreement which occurred at the end of January On March , Qualcomm announced that it will repurchase $10Bn of its stock and increase dividend by about 14% in the next 12 months [12]. Improving the EPS (by reducing the number of shares outstanding) and increasing the dividend will positively affect the firms stock price in near future. Valuation Analysis Valuation Based on Multiples So far the valuation analysis was based on the DCF model which aims to look at the intrinsic value of stocks compared to the current market price. In this section, I will look at Qualcomm s current market price and compare it with the index (S&P 500), the information technology sector and the competitors to assess how the firm s stock performing in the market. Although, this assessment provides us with useful information, the DCF is indeed the best way to identify undervaluation. Qualcomm vs S&P 500 Below graph reveals the Qualcomm s share price in the past 12 months, compared with S&P 500 index, showing that the firm s stock has performed negatively compared with the market. The following table compares Qualcomm s P/E, P/B, P/S and P/EBITDA INVESTMENT THESES 11

12 relative to S&P 500, in the past 12 months. The current P/E ratio is 0.79, indicating that it is relatively smaller than the S&P 500. During the past 12 months, however, P/E ratio of Qualcomm compared with S&P 500 was ranging from 0.61 to 1.19 with a median of Thus, the data reveals that the current P/E ratio of Qualcomm is lower than the median within the past year. The P/B ratio, relative to S&P 500, is indeed the lowest within the past 12 months. Similarly, P/S ratio compared with S&P 500 is now the lowest within the past 12 months. S&P 500 Qualcomm Looking merely at these ratios and market share price compared to S&P 500, it appears to me that Qualcomm s shares are currently undervalued. However, it is key to note that the more important comparison is between Qualcomm and the sector and peers, the upcoming sections, which will reveal more accurately how the stock has been performing. QCOM vs S&P 500 High Low Median Current P/E P/B P/S Qualcomm vs Information Technology Sector In comparison to the IT sector, Qualcomm s P/E ratio is lower than 1 and is lower than the median during the past 12 months, see below table. Similarly, the P/B ratio vs the sector is now the lowest within the last year. In contrast, P/S seems to be relatively always higher than one, although this ratio was the lowest compared to the sector within the last 12 months. Therefore, in summary, it appears that Qualcomm s stock ratios vs the sector is either at the lowest or close to lowest, indicating that Qualcomm s stock is undervalued. QCOM vs IT Sector High Low Median Current P/E P/B P/S INVESTMENT THESES 12

13 Qualcomm vs Peers Relatively to its peers, Qualcomm s ratios are shown in the below table. The peers have been chosen based on the products and the market and how close is their business to Qualcomm. These firms are either manufacturing competing products or are semiconductor firms that do not possess foundry (they are fabless), similar to Qualcomm. P/E P/B P/S P/CF Qualcomm Broadcom Corp. Texas Instrument Intel Corp Marvell Technology NVIDIA Corp lower than Qualcomm s. P/CF seems to follow the same story line, as the average (15.17) is lower than Qualcomm s (15.95). In summary, it seems to me that, apart from the P/E ratio, Qualcomm s other ratios are higher than the peers, indicating that Qualcomm s stock price is overvalued in the market relative to its peers. Multiples Evaluation Price Target Based on my assessment of Qualcomm s multiples versus the comparable firms, sector and market, I identified my target multiples each of which lead to different target prices. As shown in the below table, the average of the target prices is 14.9% higher than the current market price for Qualcomm s stock, indicating that overall Qualcomm s stock is presently undervalued, a similar conclusion to DCF valuation model. Maxim Integrated Abs Valuation Current My Target Multiple Target /Current Exp. EPS Target Price Micron Technology P/E $4.5 $90 P/B N/A $81.6 Apart from Micron Technology which has a P/E ratio of 9.58, Qualcomm s P/E ratio is almost the lowest compared to peers. The P/B ratio seems to be slightly different as Qualcomm s ratio is slightly higher than the average of peers P/B ratios (3.00). The average P/S ratio of peers is 3.55, which is P/S N/A $62.8 P/EBITDA N/A $78.7 Average $78.1 Upside/ Downside Potential Over Current Stock Price ($67.97) 14.90% INVESTMENT THESES 13

14 RISKS Owning Qualcomm s stocks similar to any other stock is associated with risks. The risks which are affecting the firm s revenue would affect its stock price too. It is therefore important to evaluate the risks that Qualcomm s facing and how these risks could impact its revenues in the coming years. Narrow Range of Products Qualcomm has limited number of very successful products including CDMA and OFDMA. The company s revenue is therefore dependent on the fact that these designs are deployed by the customers and that the customers develop other devices based on these designs. The CDMA design accounts for around 45% of Qualcomm s revenue [13]. However, the firm has consistently lost the market share to the competitors in the past ten years. The market share which was once around 81% reduced to ~60% in 2010 and reduced further in the following years. A main risk for Qualcomm is that the wireless carriers and/or customers use other competing technologies in future, instead. This will most likely completely wipe out a major source of revenue for the firm with disastrous consequences. Moreover, the future cash flow projection of Qualcomm depends on the future adaptation of 3G/4G technologies in the developing markets. Any delay in this trend could also significantly affect Qualcomm s future cash flows. The expansion in the 3G/4G networks is dependent on governments regulations. However, it is known that governments actions are generally associated with unpredictable delays, making future employment of Qualcomm s technologies even less certain. Limited Number of Customers Qualcomm s customers are mainly major portable wireless device manufacturers including Samsung and Apple. Samsung alone accounts for ~20% of Qualcomm s revenue. However, Samsung itself is a designer and manufacturer of wireless devices which may, at any point, decide to develop its own products, instead of paying royalties to Qualcomm. Recently, January 2015, Samsung announced that it may not deploy Qualcomm s Snapdragon 810 product in its Galaxy S6 smart phones due to some technical issues. During the company s quarterly earnings report on 28 Jan 2015, Qualcomm s CEO, Steve Mallengkopf, stated that we now expect that our Snapdragon 810 processor will not be in the upcoming design cycle of a large customer s flagship device, impacting our outlook for both volume and content in that device. Qualcomm owns around 94% of market share in LTE RISKS 14

15 devices via its flagship product series of Snapdragon. Chinese firm sued Qualcomm for trademark infringes, asking for $100Bn of compensation. Moreover, Intel, another Qualcomm s major customer and competitor may develop devices and designs which outclass the firm s products, making them instantly obsolete. In fact, it was announced that Intel would partially replace its design in Apple s IPhone products in 2016 [14]. The release of this single information on 11 March 2015 by an unknown source resulted in 2.25% drop in Qualcomm s market share price, while Intel gained around 2%. Legal Challenges Recently Qualcomm was engaged in a legal battle in China due to an investigation by the Chinese government s antitrust agencies which found illegal activities by Qualcomm. China is almost the largest market for the firm. Even the announcement of the investigation affected Qualcomm s earning as some of the firm s clients stopped paying their royalties for the licensed designs. Thus, a negative legal outcome could affect the firm s future cash flows significantly. However, the good news was that Qualcomm could settle the dispute in January 2015 by paying ~1Bn fine to the Chinese government as well as agreeing a change in its business model in the country. However, it appears that the legal issues in China are far from over. In March 2015, a Following the antitrust settlement in China, South Korean and EU authorities also announced that they had initiated an investigation into Qualcomm s activities in their countries. If it is found guilty by the EU, Qualcomm may be fined up to 10% of its global revenues. SUMMARY AND CONCLUDING REMARKS Based on my analysis which is reviewed in this document, I believe that the IT sector will have an above average performance in the stock market in near future. In particular, the return of the sector will be higher if there is interest rate rise by the Fed. However, the Communications Equipment sub-sector might have a weaker performance than the average of the sector. My assessment reveals that Qualcomm s stock is slightly undervalued, according to the DCF model (6.48%) and multiples valuation (14.9%). There are, however, risks associated with stock recommendation. The firm s future revenue growth is highly dependent on many factors which are not under the control of the company. These include but not limited to the narrow customer base, legal and antitrust issues in Asia and Europe, low profit margin SUMMARY AND CONCLUDING REMARKS 15

16 and the competitive nature of the industry. However I believe the return outweighs the risks, and therefore, I recommend BUY for Qualcomm s stock. Stock: Qualcomm Inc. Ticker: QCOM Current Price: $67.97 Target Price: $72.37 Recommendation: buy Analyst: Mehdi Mirsaneh BIBLIOGRAPHY [1] McKinsey&Company, "McKinsey on Semiconductors," McKinsey Practice Publications, [2] V. Katsenelson, "Qualcomm's Competitive Advantage Are Too Numerous to Ignore," Institutional Investor, [Online]. Available: garticle/ /blog/qualcommscompetitive-advantages-are-toonumerous-to-ignore.html#.vslaj_nf-h1. [Accessed ]. [3] C. Neiger, "Qualcomm's Antitrust Woes Are Far From Over," [Online]. Available: 015/02/19/qualcomms-antitrust-woesare-far-from-over-but-inv.aspx. [Accessed ]. [4] D. Roberts, Economic Outlook, [5] N. Bohnsack, Quantitative Research & Global Asset Allocation, [6] "The Blog," [Online]. Available: [Accessed ]. [7] P. Sikka, "Market Realist," [Online]. Available: mm-plans-tap-internet-things-marketgrowth/. [Accessed ]. [8] Compnay Website, "Qualcomm," [Online]. Available: [Accessed ]. [9] SEC 2014 Filings, "SEC," [Online]. Available: /804328/ /qcom10 -k2014.htm. [Accessed ]. [10] Bloomberg, [Online]. [Accessed 2015]. [11] 4-traders, "Qualcomm," [Online]. Available: traders.com/qualcomm-inc- 4897/?type_recherche=rapide&mots=qco m. [Accessed ]. [12] L. Gensler, "Qualcomm Plans $15B Stock Buyback, Hikes Dividend," Forbes, [Online]. Available: er/2015/03/09/qualcomm-plans-15bstock-buyback-hikes-dividend/. [Accessed ]. [13] Forbes Magazine, "Qualcomm Cruises To $53 If It Slows Bleeding In CDMA Market Share," Forbes, [Online]. Available: ations/2010/10/20/qualcomm-cruisesto-53-if-it-slows-bleeding-in-cdmamarket-share/. [Accessed ]. [14] M. Perrault, "Intel, Not Qualcomm, Modem Chips For iphones: Report," Investor.com, [Online]. Available: intel-modem-chipsreportedly-might-go-into-iphones.htm. [Accessed ]. BIBLIOGRAPHY 16

17 APPENDIX 1: INCOME STATEMENT FORECAST- PART 1 Consensus- Revenue $ 29,909 $ 28,470 $ 27, E 2016E 2015E Revenues: Equipment and Services $ 22,390 $ 21,324 $ 19,929 $ 18,625 $ 16,988 $ 12,465 $ 9,223 $ 6,971 Licensing $ 8,261 $ 8,180 $ 8,019 $ 7,862 $ 7,878 $ 6,656 $ 5,734 $ 4,011 Total Revenue $ 30,651 $ 29,503 $ 27,948 $ 26,487 $ 24,866 $ 19,121 $ 14,957 $ 10,982 Costs and expenses: Cost of equimpent and services revenues $ 10,728 $ 10,326 $ 10,341 $ 10,686 $ 9,820 $ 7,096 $ 4,877 $ 3,301 Research and development $ 6,130 $ 5,901 $ 5,590 $ 5,477 $ 4,967 $ 3,915 $ 2,995 $ 2,451 Selling, general and adminstrative $ 2,759 $ 2,655 $ 2,515 $ 2,290 $ 2,518 $ 2,270 $ 1,945 $ 1,503 Other $ 552 $ 531 $ 503 $ 484 $ 331 $ 158 $ 114 $ - Total costs and expenses $ 20,169 $ 19,413 $ 18,949 $ 18,937 $ 17,636 $ 13,439 $ 9,931 $ 7,255 Operating income $ 10,483 $ 10,090 $ 8,999 $ 7,550 $ 7,230 $ 5,682 $ 5,026 $ 3,727 Investment income, net $ 1,379 $ 1,328 $ 1,258 $ 1,228 $ 964 $ 880 $ 661 $ 766 Income from continuing operations before income tax $ 11,862 $ 11,418 $ 10,257 $ 8,778 $ 8,194 $ 6,562 $ 5,687 $ 4,493 Income tax expense $ (1,779) $ (2,055) $ (1,539) $ (1,244) $ (1,349) $ (1,279) $ (1,132) $ (973) Income from continuing operations $ 10,083 $ 9,363 $ 8,718 $ 7,534 $ 6,845 $ 5,283 $ 4,555 $ 3,520 Discontinued operations, net of income taxes $ - $ - $ - $ 430 $ - $ 776 $ (313) $ (273) Net income $ 10,083 $ 9,363 $ 8,718 $ 7,964 $ 6,845 $ 6,059 $ 4,242 $ 3,247 Net loss attributable to noncontrolling interests $ - $ - $ - $ 3 $ 8 $ 50 $ 18 $ - Net income attributable to Qualcomm $ 10,083 $ 9,363 $ 8,718 $ 7,967 $ 6,853 $ 6,109 $ 4,260 $ 3,247 Basic earning per share attributable to Qualcomm: Continuing operations $ 4.48 $ 3.99 $ 3.14 $ 2.76 $ 2.15 Discontinoued operations $ 0.25 $ - $ 0.45 $ (0.19) $ (0.17) Net income $ 4.73 $ 3.99 $ 3.59 $ 2.57 $ 1.98 Diluted earnings per share attributable to Qualcomm: Continuing operations $ 4.40 $ 3.91 $ 3.06 $ 2.70 $ 2.12 Discontinoued operations $ 0.25 $ - $ 0.45 $ (0.18) $ (0.16) Net income per share (EPS) $ 5.88 $ 5.46 $ 5.09 $ 4.65 $ 3.91 $ 3.51 $ 2.52 $ 1.96 Consensus EPS $ 5.68 $ 5.31 $ 4.96 Shares used in per share calculations: Basic 1,683 1,715 1,700 1,658 1,643 Diluted 1,714 1,714 1,714 1,714 1,754 1,741 1,691 1,658 Dividend per share announced $ 1.54 $ 1.20 $ 0.93 $ 0.81 $

18 APPENDIX 2: INCOME STATEMENT FORECAST-PART 2 Mehdi Mirsaneh Inventories $ 1,686 $ 1,623 $ 1,537 $ 1,458 $ 1,302 $ 1,030 $ 765 $ 528 % of sales 5.50% 5.50% 5.50% 5.50% 5.24% 5.39% 5.11% 4.81% Accounts receivable, net $ 2,759 $ 2,655 $ 2,515 $ 2,412 $ 2,142 $ 1,459 $ 993 $ 730 % of sales 9% 9% 9% 9.11% 8.61% 7.63% 6.64% 6.65% Trade accounts payable $ 2,452 $ 2,360 $ 2,236 $ 2,183 $ 1,554 $ 1,298 $ 969 $ 764 % of sales 8% 8% 8% 8.24% 6.25% 6.79% 6.48% 6.96% Change in WC $ (75) $ (101) $ (130) $ 203 $ (699) $ (402) $ (295) $ (494) Revenue Change Equipment and services as % of sales 70.32% 68.32% 65.19% 61.66% 63.48% Annual growth rate 5.0% 7.0% 7.0% 9.64% 36.29% 35.15% 32.31% 8.30% Licensing as % of sales 29.68% 31.68% 34.81% 38.34% 36.52% Annual growth rate 1.0% 2.0% 2.0% -0.20% 18.36% 16.08% 42.96% 1.54% Total Revenue % change 3.89% 5.57% 5.52% 6.52% 30.05% 27.84% 36.20% 5.73% Costs & expenses Cost of equimpent and services revenues as % of sales 35% 35% 37% 40.34% 39.49% 37.11% 32.61% 30.06% Annual % change 8.82% 38.39% 45.50% 47.74% 9.12% Research and development as % of sales 20.0% 20.0% 20.0% 20.68% 19.98% 20.47% 20.02% 22.32% Annual % change 10.27% 26.87% 30.72% 22.20% 4.52% Selling, general and adminstrative as % of sales 9.0% 9.0% 9.0% 8.65% 10.13% 11.87% 13.00% 13.69% Annual % change -9.05% 10.93% 16.71% 29.41% 2.80% Other as % of sales 1.80% 1.80% 1.80% 1.83% 1.33% 0.83% 0.76% 0.00% Annual % change 46.22% % 38.60% #DIV/0! % Total cost % change 3.89% 2.45% 0.06% 7.38% 31.23% 35.32% 36.88% -7.52% Inestment income as % of sales 4.50% 4.50% 4.50% 4.64% 3.88% 4.60% 4.42% 6.98% Annual growht rate 27.39% 9.55% 33.13% % #DIV/0! Operating margin 38.70% 38.70% 36.70% 33.14% 32.95% 34.32% 38.02% 40.91% Effective tax rate 15% 18% 15% 14.2% 16.5% 19.5% 19.9% 21.7% 18

19 APPENDIX 3: DCF MODEL Mehdi Mirsaneh Discount factor 10.75% Long term growth rate 4.0% Year E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenue $ 26,487 $ 27,948 $ 29,503 $ 30,651 $ 32,184 $ 33,632 $ 34,978 $ 36,377 $ 37,832 $ 39,345 $ 40,919 $ 42,555 %Grow th 5.5% 5.6% 3.9% 5.0% 4.5% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Operating Income $ 8,778 $ 10,257 $ 11,418 $ 11,862 $ 11,586 $ 11,771 $ 11,892 $ 12,368 $ 12,863 $ 13,377 $ 13,912 $ 14,469 Operating Margin 33.1% 36.7% 38.7% 38.7% 36.0% 35.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% Taxes $ (1,244) $ (1,539) $ (2,055) $ (1,779) $ (1,738) $ (1,766) $ (1,784) $ (1,855) $ (1,929) $ (2,007) $ (2,087) $ (2,170) Tax Rate 14.2% 15.0% 18.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Net Income $ 7,967 $ 8,718 $ 9,363 $ 10,083 $ 9,848 $ 10,006 $ 10,108 $ 10,513 $ 10,933 $ 11,371 $ 11,826 $ 12,299 %Grow th 16.3% 9.4% 7.4% 7.7% -2.3% 1.6% 1.0% 4.0% 4.0% 4.0% 4.0% 4.0% Depreciation & Amortization $ 1,150 $ 1,258 $ 1,328 $ 1,379 $ 1,448 $ 1,513 $ 1,574 $ 1,637 $ 1,702 $ 1,771 $ 1,841 $ 1,915 % of sales 4.3% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Changes in WC $ 203 $ (130) $ (101) $ (75) $ (97) $ (101) $ (105) $ (109) $ (113) $ (118) $ (123) $ (128) % of sales 0.77% 0.46% 0.34% 0.24% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% CapEx $ 1,185 $ 1,258 $ 1,328 $ 1,379 $ 1,448 $ 1,513 $ 1,574 $ 1,637 $ 1,702 $ 1,771 $ 1,841 $ 1,915 CapEx % of sales 4.47% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% Free Cash Flow $ 8,135 $ 8,589 $ 9,262 $ 10,008 $ 9,752 $ 9,905 $ 10,004 $ 10,404 $ 10,820 $ 11,253 $ 11,703 $ 12,171 NPV of Cash Flows 63, % NPV of terminal value 60, % Terminal Value 187,522 Projected Equity Value 124, % Free Cash Flow Yield Free Cash Yield 6.49% Current P/E Terminal P/E 15.2 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 2.6 Projected EV/EBITDA Shares Outstanding 1,714 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 6.48% Debt - Cash 17,790 Cash/share

20 APPENDIX 4: SENSITIVITY ANALYSIS OF VALUATION Mehdi Mirsaneh Sensitivity Analysis: Discount Rate $ % 9.75% 10.25% 10.75% 11.25% 11.75% 12.25% 12.75% 1% $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ % $ $ $ $ $ $ $ $ TV Growth Rate Sensitivity Analysis: Discount Rate 3.64% 9.25% 9.75% 10.25% 10.75% 11.25% 11.75% 12.25% 12.75% 1% 3.7% -2.5% -8.1% -13.1% -17.5% -21.6% -25.3% -28.6% 2% 10.7% 3.4% -3.1% -8.8% -13.8% -18.4% -22.5% -26.2% 3% 20.0% 11.1% 3.3% -3.4% -9.3% -14.5% -19.1% -23.3% 4% 32.8% 21.4% 11.8% 3.6% -3.4% -9.5% -14.9% -19.7% 5% 51.6% 36.1% 23.5% 13.1% 4.3% -3.1% -9.6% -15.2% 6% 82.0% 58.6% 40.7% 26.5% 15.0% 5.5% -2.5% -9.3% 7% 139.4% 97.5% 68.4% 47.1% 30.7% 17.7% 7.2% -1.4% TV Growth Rate 20