QUALCOMM, Inc. (NASDAQ:QCOM)‘s post-earnings decline was minor at best, and while there are reasons for investors to be a little concerned about the stock, the long-term story is intact. There were some things that warranted caution and trimming of positions. I am always for re-balancing positions as required, but the story for QUALCOMM, Inc. (NASDAQ:QCOM) is far from over so do not throw out the baby with the bathwater. The company has decided to reward patient shareholders by upping its dividend. That helps mitigate some of the risk I see.
Growth stock concept’s cracked facade
I am starting to think that the entire concept of a growth stock has become outmoded by the popularity of the concept of a growth stock. If you want to see what the post-growth world of a company looks like, then you need look no further than Cisco Systems, Inc. (NASDAQ:CSCO), but more on that later.
Growth stocks are priced far above earnings, because one day, the company will be so amazing that it will make all the pie in the sky dreams of investors come true, but this is not the case. Most growth stocks deserve their initial high valuation for the time that they meet and then exceed those levels, but as the growth story unfolds, the companies see even greater valuations on sentiment. Many people buy into the growth story and this puts it on such a high cliff that a slight breeze will send it tumbling.
The true growth stock would see explosive growth and then settle at a specific price until the underlying fundamentals catch up and then continue. As the company matures, it should maintain its price while growing earnings, which reduces the PE. An ideal growth story priced properly would not need to collapse as the growth story ended, because it will deliver on its growth expectations.
QUALCOMM, Inc. (NASDAQ:QCOM) was never a growth stock
What is the difference between a growth stock and a mature company experiencing a resurgence of growth? For the market it is not much, but for the discerning mind, they are worlds apart. QUALCOMM, Inc. (NASDAQ:QCOM) is massively profitable from an earnings and cash perspective. Its cash balance was built via operations, not investment capital and loans. I have had QUALCOMM, Inc. (NASDAQ:QCOM) presented to me as a growth story very often, but it does not have a high PE. The only resemblance is the focus on the company’s need to chase growth to justify its share price. I think the company can continue higher even with slowing growth.
Analyzing the decline, financial websites look for something to say about any decline. I suppose you can say guidance came in light, but still fantastically high. When I look at growth and profit growth, I do not just like to look at the number and see much higher it is than the previous number. I like to look at what the company will do with all that profit.
QUALCOMM, Inc. (NASDAQ:QCOM)’s story is not over, and it should not be judged like a growth stock that needs to chase growth to maintain its value. A lot of companies, like Samsung Electronics Co., Ltd. (KRX:005930) and Apple Inc. (NASDAQ:AAPL), are capable of making their own chips, however, Samsung Electronics Co., Ltd. (KRX:005930) has had some issues with the Exynos and opted for Snapdragon. Samsung Electronics Co., Ltd. (KRX:005930) has enough to do without having to worry about its processor. I am not sure I buy the story that everyone will want to make their own SoCs. Integrating LTE into the SoC also adds another layer of complexity that Qualcomm has better expertise dealing with than some phone maker that wants to use custom kit.