QUALCOMM, Inc. (QCOM): Did Goldman Lowball With $80 Price-Target?

QUALCOMM Incorporated (QCOM) is on the go this humpday thanks in large part to an upgrade from Goldman Sachs. The masters of the financial universe added the communication equipment maker to their Conviction Buy List, but left the price target unchanged at $80.

More conviction, but same target price… things that make you go hmmm?

Analyst Simona Jankowski thinks QCOM's price performance could play catch up with the likes of Cisco Systems (CSCO), Motorola Solutions (MSI), and Texas Instruments (TXN).

Jankowski notes the underperformance of QCOM as a reason for her change of heart. She says, "QCOM has lagged the market, +11% ytd vs. the S&P +24%, as upward estimate revisions have been offset by multiple compression. QCOM's NTM P/E multiple has compressed from 14.2X to 13.2X over the last 12 months as sales growth is expected to decelerate with smartphone penetration leveling off (CY10-13E sales CAGR of 30% vs. our CY13E-CY16E sales CAGR of 9%). We believe the multiple compression is largely behind us, as more aggressive capital allocation and expanding chipset margins should drive accelerating earnings growth from here."

[Related -Qualcomm (QCOM) Guidance Raises Questions]

Simona believes the EPS growth will come from fatter profit margins, "We also estimate that Qualcomm's chipset segment margins marked a bottom last quarter and will expand by more than 400bp over the next 4 quarters on structural cost improvements and mix. Coupled with opex cuts, this should help drive an 850bp expansion in Qualcomm's operating margins over the next 4 quarters, with non-GAAP EPS growth going from -1% yoy in 1QFY14E (Dec.) to 32% in 4QFY14E (Sep.)."

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Goldman sets 2014 non-GAAP EPS at $5.43, but says there could be more. To get to $80, the NASDAQ 100 member needs to trade at 14.73 times Jankowski estimate.

iStock thinks Simona could be sandbagging based on the math in the paragraph above and QCOM's five-year price-to-earnings (P/E) ratio. The chip maker's lowest P/E in the last half-decade was 15.35 with an average of 24.79.

During the same timeframe, EPS grew at an average of 20.47%, w! hich means QUALCOMM tends to trade at a 21% premium to its growth rate. Net income is expected to increase by 12.2% this year, not including Jankowski's possible upside to EPS. A 21% markup would deliver a P/E of 14.76, which is spot on for Simona's $80 price target.

Overall: $80 could prove to be a lowball price target for QUALCOMM Incorporated (QCOM). If Simona Jankowski's numbers and margin expansion predictions prove true, then $100 is a possibility, too, in our opinion.