We think that Qualcomm Inc. currently is a better pick compared to Motorola Solutions Inc.. Qualcomm stock trades at about 16.3x trailing earnings, much lower than MSI, whose P/E multiple stands at 36.4x. Does this gap in the companies’ valuations make sense? We don’t think so. While QCOM has benefited from the pandemic, MSI has seen a drop in demand for its products since the pandemic hit in early-2020. MSI’s revenue had dropped from $7.9 billion in FY ’19 to $7.4 billion in FY ’20, before recovering to $7.9 billion on an LTM basis. QCOM, too, initially saw a drop in sales, with revenue dropping from $24.3 billion in FY ’19 to $23.5 billion in FY ’20, before surging and standing at $32.6 billion on an LTM basis. The rise in demand for smart devices and the global spread of 5G technology has pushed up demand for Qualcomm’s chipsets over the past 6-8 months.
Meanwhile, when it comes to EBIT margins, after the initial drop over FY ’20, both companies’ margins currently stand at their respective FY ’19 levels. However, a closer look reveals that Qualcomm’s margins surged sharply from 2.7% in FY ’18 to 31.6% in FY ’19 due to the one-time legal settlement income with Apple, combined with a renewed chipset deal, which almost doubled licensing income in FY ’19. The fact that margins stand at that same level on an LTM basis, reveals the true depth of demand growth for Qualcomm’s products over the past year.
Having said that, there is more to the comparison, which makes Qualcomm a better bet than MSI even at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Motorola Solutions Inc. vs Qualcomm: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Qualcomm Is The Clear Winner On Revenue Growth
While Motorola has seen steady revenue growth since FY ’17, Qualcomm has performed better over the same period. MSI’s revenue rose from $6.4 billion in FY ’17 to $7.9 billion on an LTM basis, a rise of 23.4%. Meanwhile, Qualcomm’s revenues rose from $22.3 billion to $32.6 billion, a jump of more than 45%, double that of the growth in MSI’s revenues.
Further, Qualcomm is a much larger company, with more than 4x the revenue of Motorola Solutions Inc., making the 2x gap in revenue growth even more impressive.
2. EBIT margins: A mixed bag for both companies
Qualcomm’s margins dropped from 11.6% in FY ’17 to 2.7% in FY ’18, due to the legal battle with Apple, before surging to 31.6% in FY ’19 upon the subsequent settlement and renewed chipset deal. While margins suffered in FY ’20, they are back at FY ’19 levels currently (on an LTM basis).
Meanwhile, MSI has also seen volatile margins, fluctuating between 17% and 20% since FY 2017, and currently standing at 19.9% on an LTM basis.
Despite unstable margins for both companies, Qualcomm’s recent surge in earnings has come on the back of strong demand growth for its chipsets, a trend we expect to continue in the near to medium term.
3. Qualcomm In A Better Net Cash Position
Qualcomm’s debt-to-equity ratio currently stands at 1.4%, a fraction of MSI’s current debt-to-equity ratio that stands at 13.5%. Further, Qualcomm’s cash-to-assets stands at 33.3%, almost double that of Motorola Solutions’ 17.3%.
The Net of It All
While Qualcomm’s revenues and margins are larger than that of MSI, the former has also seen significantly stronger growth in revenues and operating margins compared to MSI. Looking at the post-Covid recovery, Qualcomm has fared far better, with LTM revenues more than 30% higher than the pre-Covid fiscal year (FY 2019), while MSI’s LTM revenues stand at roughly the same level as those in FY 2019. As MSI has a higher P/EBIT ratio of 27 vs Qualcomm’s 14x, and a higher P/E ratio at 35x vs Qualcomm’s 16x, Qualcomm has the potential to close this gap, supported by strong financials. As such, we believe that Qualcomm is currently a much better bet compared to Motorola Solutions stock.
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