We think that Qualcomm Inc. is currently a better choice compared to Motorola Solutions Inc.. Qualcomm stock is trading at around 16.3 times rolling earnings, well below MSI, which has a P / E multiple of 36.4 times. Does this gap in company valuations make sense? We do not think so. While QCOM has benefited from the pandemic, MSI has seen a drop in demand for its products since the pandemic struck in early 2020. MSI’s revenue fell from $ 7.9 billion during the year. FY2019 to $ 7.4 billion in FY20, before rising to $ 7.9 billion on an LTM basis. QCOM also initially saw a decline in sales, with revenues dropping from $ 24.3 billion in fiscal 2019 to $ 23.5 billion in fiscal 20, before increasing and s ‘establish at $ 32.6 billion on an LTM basis. Rising demand for smart devices and the global spread of 5G technology has driven demand for Qualcomm’s chipsets up over the past 6-8 months.
Meanwhile, with regard to EBIT margins, after the initial decline in FY ’20, the margins of both companies are currently at their respective levels for FY ’19. However, a closer look reveals that Qualcomm’s margins increased sharply from 2.7% in fiscal 2018 to 31.6% in fiscal 2019 due to revenue from the single legal settlement with Apple, combined with a renewed agreement on the chipset, which nearly doubled licensing revenue in FY19. The fact that the margins are at the same level on an LTM basis, reveals the true depth of growth in demand for them. Qualcomm’s products over the past year.
That said, there’s more to the comparison, which makes Qualcomm a better bet than MSI, even at these reviews. Let’s step back to take a more complete picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating profit and operating margin growth. Our dashboard Motorola Solutions Inc. vs. Qualcomm: industry peers; Which action is a better bet? has more details on this. Parts of the analysis are summarized below.
1. Qualcomm is the clear winner in revenue growth
While Motorola has seen steady revenue growth since fiscal year 2017-18, Qualcomm has performed better over the same period. MSI’s revenue grew from $ 6.4 billion in fiscal 2017 to $ 7.9 billion on an LTM basis, an increase of 23.4%. Meanwhile, Qualcomm’s revenue rose from $ 22.3 billion to $ 32.6 billion, a jump of more than 45%, double the growth in MSI’s revenue.
Additionally, Qualcomm is a much bigger company, with more than 4 times the revenue of Motorola Solutions Inc., which makes the 2 times revenue growth gap even more impressive.
2. EBIT margins: A mixed bag for the two companies
Qualcomm’s margins fell from 11.6% in FY ’17 to 2.7% in FY ’18, due to legal battle with Apple, before rising to 31.6% in FY ’19 on subsequent settlement and renewal of the chipset agreement. While margins suffered in FY ’20, they are currently back to FY ’19 levels (on an LTM basis).
Meanwhile, MSI has also experienced volatile margins, fluctuating between 17% and 20% since fiscal 2017, and currently standing at 19.9% ââon an LTM basis.
Despite volatile margins for both companies, Qualcomm’s recent profit increase is driven by strong growth in demand for its chipsets, a trend we expect to continue in the short to medium term.
3. Qualcomm in a better net cash position
Qualcomm’s debt ratio currently stands at 1.4%, a fraction of MSI’s current debt ratio of 13.5%. In addition, Qualcomm’s cash-to-assets amounted to 33.3%, almost double that of Motorola Solutions’ 17.3%.
The net of everything
While Qualcomm’s revenue and margins are higher than MSI’s, the former also experienced significantly stronger revenue and operating margin growth compared to MSI. Regarding the post-Covid recovery, Qualcomm is faring much better, with LTM revenues more than 30% higher than in the pre-Covid fiscal year (fiscal year 2019), while MSI’s LTM revenues are are roughly on par with FY2019. As MSI has a higher P / EBIT ratio of 27 over Qualcomm’s 14x, and a higher P / E ratio at 35x over Qualcomm’s 16x , Qualcomm has the potential to close this gap, supported by strong financial data. As such, we think Qualcomm is currently a much better bet compared to Motorola Solutions’ stock.
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