Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Qualcomm Inc – March 2021 Annual Meeting of Stockholders Presentation

By Callum Turcan

One of our favorite semiconductor plays is Qualcomm Inc (QCOM). For those just getting familiar with the name, the company is about much more than just supplying components used in smartphones. While the rollout of 5G-capable smartphones will provide Qualcomm’s medium-term financial performance a large boost due to its Snapdragon mobile platform offerings, another key aspect of Qualcomm’s promising growth story is its exposure to the automotive industry.

Background Information

Historically, Qualcomm has focused on supplying components to the automotive industry in the realm of infotainment (such as enabling radio, TV, mapping, and navigation services), telematics (combining automotive technologies with telecommunications and other technologies), and instrument clusters (digital car dashes). In January 2021, Qualcomm reached a deal with Veoneer Inc (VNE), an American-Swedish firm focused on automotive technology, to develop software and “chip” platforms for advanced driver assistance systems (‘ADAS’). Veoneer is using its Arriver unit to advance its ambitions in this space. Note, Arriver software can be used with Qualcomm’s Snapdragon Ride Platform.

Back in January 2020, Qualcomm unveiled its Snapdragon Ride Platform, which is built on “Snapdragon Ride Safety system-on-chips (SoCs), Snapdragon Ride Safety Accelerator and Snapdragon Ride Autonomous Stack” to offer a scalable autonomous vehicle driving solution capable of supporting advanced technologies. At the time of the announcement, keeping headwinds from the coronavirus (‘COVID-19’) pandemic in mind, the goal was to make Snapdragon Ride available in pre-development form to automotive firms and key suppliers in the first half of 2020 with vehicles built with the technology to become available by 2023. Here is what the press release had to say:

Snapdragon Ride aims to address the complexity of autonomous driving and ADAS by leveraging its high-performance, power-efficient hardware, industry-leading artificial intelligence (AI) technologies and pioneering autonomous driving stack to deliver a comprehensive, cost and energy efficient systems solution.

The unique combination of Snapdragon Ride SoCs, accelerator and autonomous stack offers automakers a scalable solution designed to support three industry segments of autonomous systems, namely L1/L2 Active Safety ADAS for vehicles that include automatic emergency braking, traffic sign recognition and lane keeping assist functions; L2+ Convenience ADAS for vehicles featuring Automated Highway Driving, Self-Parking and Urban Driving in Stop-and-Go traffic; and L4/L5 Fully Autonomous Driving for autonomous urban driving, robo-taxis and robo-logistics. 

In fiscal 2020 (period ended September 27, 2020), Qualcomm’s ‘automotive’ sales at its Qualcomm CDMA Technologies (‘QCT’) division stood at $0.6 billion. While that was relatively small compared to its handset-related sales, which generated the lion’s share of its QCT division’s $16.5 billion in revenues in fiscal 2020, that figure will likely grow substantially going forward. Here is what Qualcomm’s Fiscal 2020 Annual Report had to say on the automotive industry’s outlook:

For example, in the automotive industry, approximately 70% of new vehicles produced in 2025 are projected to have cellular connectivity, compared to 48% in 2019 (Strategy Analytics, October 2020). In addition, the installed base of non-mobile devices with cellular connectivity, which includes IoT devices among others, is projected to grow 190% between 2020 and 2024 (ABI Research, October 2020).

We like Qualcomm’s exposure to this arena. Recently, the company announced it was pursuing a significant acquisition in this space that would further enhance its automotive upside, should Qualcomm win the bidding war.

Potential Acquisition and Bidding War

To keep the momentum going in the right direction, Qualcomm announced on August 5 that it had offered to acquire Veoneer for $37.00 per share in cash for a total equity value of $4.6 billion (according to a letter Qualcomm sent to Veoneer). Qualcomm noted that the deal would be funded with “existing cash resources” given it had $12.9 billion in cash, cash equivalents, and cash on hand at the end of the third quarter of fiscal 2021 (period ended June 27, 2021). Inclusive of short-term debt, Qualcomm had a relatively modest net debt position of $2.8 billion at the end of this period.

Magna International Inc (MGA), a Canadian automotive technology firm, offered to buy Veoneer for $31.25 per share in cash on July 22 for an equity value of $3.8 billion, a deal that Veoneer had accepted before Qualcomm made its move. As a relevant aside, Veoneer had a net cash position of ~$0.3 billion (inclusive of long-term convertible notes and long-term finance lease liabilities, exclusive of restricted cash and long-term equity method investments) at the end of June 2021. It appears a bidding war may be afoot, though Qualcomm possesses substantially more financial firepower than Magna International (Qualcomm’s market capitalization stands north of $165 billion while Magna International’s market capitalization is just below $26 billion as of this writing).

At the end of June 2021, Magna International had $3.4 billion in cash and cash equivalents on hand (its long-term investments position was largely if not entirely represented by strategic investments). Inclusive of short-term debt, Magna International had a $0.6 billion net debt position at the end of this period. Magna International possesses the ability to significantly raise its bid for Veoneer, though the firm would have to tap capital markets to raise additional funds to do so. In our view, Qualcomm is likely to win any potential bidding war, short of Magna International offering a sum that is simply too good to pass up and would be value destructive for Qualcomm (an unlikely scenario).

Concluding Thoughts

We are huge fans of Qualcomm. The company generated $8.0 billion in free cash flow during the first nine months of fiscal 2021 while spending $2.2 billion covering its dividend obligations and $2.6 billion buying back its common stock. Qualcomm has ample room to continue boosting its payout going forward while making strategic investments in its business, such as acquiring Veoneer.

Should Qualcomm lose the bidding war for Veoneer, we would still be big fans of the firm, though we think this is an acquisition worth pursuing aggressively given the immense long-term upside there is to be had in the autonomous driving space (particularly as it concerns supplying semiconductor components, software, and related offerings to automakers and automotive suppliers). We include Qualcomm as an idea in the Dividend Growth Newsletter portfolio.

Shares of QCOM yield ~1.9% as of this writing and its Dividend Cushion ratio sits at a stellar 3.4. Qualcomm earns “EXCELLENT” Dividend Growth and Dividend Safety ratings. Our fair value estimate for Qualcomm sits at $171 per share, well above where the company is trading at as of this writing. We view Qualcomm’s share repurchases as a solid use of the firm’s capital, in moderation. To read more about Qualcomm, please check out our June 2021 article Dividend Growth Idea Qualcomm Proactively Managing Fallout from Global Chip Shortage which can be viewed here.

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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Cisco Systems Inc (CSCO), and Microsoft Corporation (MSFT) are all included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Facebook Inc (FB), Korn Ferry (KFY), PayPal Holdings Inc (PYPL), and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Oracle Corporation (ORCL) and Qualcomm Inc (QCOM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.