QUALCOMM Incorporated's (NASDAQ:QCOM) Shares Climb 25% But Its Business Is Yet to Catch Up

QUALCOMM Incorporated (NASDAQ:QCOM) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 88% in the last year.

Since its price has surged higher, QUALCOMM's price-to-earnings (or "P/E") ratio of 26.1x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

QUALCOMM has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for QUALCOMM

If you'd like to see what analysts are forecasting going forward, you should check out our free report on QUALCOMM.

Does Growth Match The High P/E?

In order to justify its P/E ratio, QUALCOMM would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 6.8% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.3% per year over the next three years. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.

In light of this, it's curious that QUALCOMM's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

QUALCOMM shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that QUALCOMM currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for QUALCOMM with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on QUALCOMM, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.