It certainly seems that all hope is lost for Qualcomm (QCOM).
Last week, QCOM stock fell 12% to cap off cumulative losses of 30% in 2015. The reason was poor earnings that showcased a 28% decline in adjusted earnings, bleak guidance, and changes to how QCOM presents financial data.
Qualcomm stock is surrounded by uncertainty, and while that doesn’t look good, there are still reasons that QCOM is a good long-term investment.
What’s Going On With QCOM Stock?
QCOM is a semiconductor company, but primarily a mobile chip company. It develops and sells the chips and technology that power smartphones. The growth in smartphones and tablets across the globe caused Qualcomm’s revenue to double since 2010.
However, total revenue in QCOM’s last quarter fell 18% year-over-year, and apparently, the future is not looking much brighter.
On the conference call, Qualcomm management announced a change to reporting financial data from year-over-year to quarter-over-quarter. The shift comes because QCOM’s year-over-year revenue is declining double digits, and is expected to fall 20% in the coming quarter.
And on top of this, QCOM is doing away with longer-term guidance, which isn’t exactly a vote of confidence to shareholders.
That said, Qualcomm’s problem comes down to two things: 1) licensing issues and a slowdown in China, where half of QCOM’s revenue is created, and then 2) Samsung electing not to use QCOM chips in its Galaxy S series.
While these thing are obvious drags on Qualcomm stock, it is now 30% off its 52-week high, and given its valuation, QCOM stock is now a good buying opportunity.
QCOM Is Too Cheap to Ignore
Right now, the S&P 500 is trading at 18 times next year’s expected earnings. If we remove QCOM’s $31 billion cash pile, then QCOM stock trades at just 6.6 times FY2016 EPS if the company is successful in earning $4.88 per share next year. That represents a deep discount to the S&P 500 and the 22.5 times multiple found in the communications equipment industry.
With that said, QCOM stock was deserving of some loss given its poor performance, but 6.6 times FY2016 EPS minus cash is far too cheap. This suggests that there is limited if any downside remaining in Qualcomm stock. So, even if QCOM does not immediately trade higher, investors can still capitalize on its 3.4% dividend yield.
Also, with nearly $2.7 billion of dividend costs needed for the next four quarters, Qualcomm still has a lot of room to increase its payout.
The company pays out less than 50% of its trailing 12-month net income on dividends, which means that QCOM can afford to maintain a trend where it has hiked its dividend by at least 10% in each of the last five years — increasing from a 19-cent quarterly payout to 48 cents.
Will Qualcomm Return to Growth?
Given that QCOM’s valuation is so cheap, coupled with its big yield and a willingness to hike its dividend, Qualcomm stock looks like a good investment opportunity. And while this year is sure to be rough as QCOM struggles with problems in China, the Internet of Things is still a huge catalyst for the company and its stock.
According to Goldman Sachs, the number of “things” connected to the internet could grow nearly tenfold by 2020 to 28 billion. These include wearables, consumer electronics, cars, houses, cities and then also industrial internet for healthcare, transportation, and oil and gas industries.
While many of these things will connect to WiFi and hotspots, there will still be billions of things that connect to mobile networks, and those things will need chips to connect to and communicate with those networks — i.e., Qualcomm technology.
As a reference, Cisco expects mobile data consumption to grow from 4.2 exabytes per month in 2015 to 24.3 exabytes by 2019, thereby showcasing the growth for things connected to mobile networks.
As a result, QCOM might be having a hard time right now, but all that looks temporary for three reasons: QCOM stock is cheap with little to no downside; Qualcomm has a great dividend and history of upping its payout; and the IoT remains a huge growth catalyst for QCOM.
So needless to say, QCOM stock is a good buy behind such big losses.
As of this writing, Brian Nichols does not own shares of QCOM but may take a position in the next 72 hours
