This Just In: Qualcomm Stock Upgraded

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Apple (NASDAQ: AAPL) broke new ground when it introduced the iPhone X this week -- on price, of course (the $999 MSRP), but also on tech. Among other developments, iPhone X boasts new sensors from STMicroelectronics (NYSE: STM) that permit Apple to do away with the home button and fingerprint identification for unlocking its phones, instead using facial recognition.

And for Qualcomm (NASDAQ: QCOM) investors, it's that last bit that could be the most important news of all. Here are three things you need to know about that.

1. Apple didn't choose Qualcomm

Apple did not tap Qualcomm to provide the sensors that iPhone X uses for unlocking its phones via facial recognition. That honor fell to STMicroelectronics. But as investment banker Northland Capital opines today, in a note covered on (subscription required), where Apple has led with the iPhone X, Android phonemakers like Samsung and LG are likely to follow -- and that could be good news for Qualcomm.

2. Why STMicro's chip win could benefit Qualcomm

Qualcomm and Himax Technologies (NASDAQ: HIMX) have partnered up, you see, to produce a "SLiM structured light solution" that provides "high resolution, low power active 3D depth sensing" for smartphone cameras. With SLiM, say the companies, phonemakers will be able to integrate not just facial recognition technology, but also "3D reconstruction, and scene perception for mobile, IoT, surveillance, automotive and AR/VR" into their phones.

Northland believes that Qualcomm's and Himax's SLiM technology is positioned to become the "de facto leading 3D sensing solution" for Android manufacturers aiming to follow where Apple has led with the iPhone X. What's more, Northland hypothesizes that SLiM may be built in a way such that it must work in conjunction with Qualcomm's next-generation Snapdragon chipset -- thus securing even more valuable real estate for Qualcomm among the innards of high-end smartphones.

3. What this means for Qualcomm investors

All of the above has Northland feeling bullish about Qualcomm shares. After raising its price target on already outperformed-rated Himax earlier this week, Northland this morning decided to upgrade Qualcomm stock as well. Doubling down on its existing $62.50 price target, Northland upgraded Qualcomm shares to outperform.

From today's share price of $51 and change, that works out to more than 21% potential profit for new Qualcomm investors. When combined with Qualcomm's generous 4.5% dividend yield, this implies a total estimated return of nearly 26% over the next 12 months.

The most important thing: Valuing Qualcomm

So, does this mean you should buy Qualcomm stock? That 26% promise sure sounds good, but before you click the buy button, it's worth taking a moment to consider the valuation.

Priced at 20 times earnings today, with minimal debt (just $1 billion, net of cash) and strong free cash flow ($3.8 billion for the past 12 months, or about 97% of reported net income, according to data from S&P Global Market Intelligence), Qualcomm stock doesn't look expensive, except for one thing: Most analysts who follow Qualcomm do not expect the stock to reap any huge gains from Apple's introduction of the iPhone X.

Within the iPhone X itself, Barron's reports there is "little changed" about how much chip real estate Qualcomm controls. Nor is there any guarantee that a strong performance by the iPhone will necessarily result in strong sales of Android phones -- or improved profits for parts suppliers to those phones. (To the contrary: One might even wonder if Android phone makers, wanting to imitate Apple, might choose instead to buy STMicroelectronics chips for their phones as well!) As a result, on average, analysts following Qualcomm expect the stock to grow earnings at no better than 11% or so annually over the next five years.

Not all Fools will agree with me on this one, I know. But with a growth rate so low, I just can't see Qualcomm's current P/E ratio of 20 as particularly attractive today, Northland's buy rating notwithstanding.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm. The Motley Fool has a disclosure policy.