Qualcomm: China Woes Make QCOM a Bargain

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Qualcomm (QCOM), is the leading mobile chipmaker in the world, with a patent library that is one of most valuable on the planet.

Qualcomm: China Woes Make QCOM A BargainBut it has had some trouble in China, and that’s the key reason the stock is off 35% this year.

In essence, QCOM gets about a 3.5% to 5% royalty on the wholesale price of every mobile phone sold with its chipset inside — and there are a lot of mobile phones with QCOM chipsets.

Qualcomm Lawsuit Troubles

The problem arose when China — a market where QCOM derives about half its revenue these days — sued the company on antitrust grounds, made it pay a nearly $1 billion fine and renegotiated its royalty rate to 65% of wholesale value of each QCOM equipped phone.

The ruling only affected phones for the Chinese market, but that is going to have a real effect on earnings over the following quarters. What’s more, many Chinese phone makers under-report the amount of phones they ship to lower their royalty payments.

It’s also looking like South Korea may be moving down the same road as China; threatening a similar antitrust lawsuit. It’s home to major phone makers LG (LPL) and Samsung (SSNLF).

The point is, as the Asian economic slowdown continues, countries are looking for any competitive advantage for its country’s major corporations, and QCOM is the unfortunate target at this point.

But the question is, is this the beginning of the end for QCOM or a great buying opportunity?

I suspect the latter, for three reasons.

Looking Ahead for QCOM Stock

First, QCOM is already reasserting itself in China by making the major OEMs renegotiate long-term licensing contracts under the new terms. Upstarts ZTE and Xaomi have committed. Lenovo (LNVGY) and Huawei continue to kick the can down the road. They may be looking to see if they can find a better deal with Intel (INTC) or some other mobile chipmaker, but QCOM stock is the industry leader because its chipsets are the best.

And that performance difference will be evident in the phones, which is why the up-and-comers have signed on and the big players are trying to save money. Penny wise, pound foolish.

Second, a bad result in the South Korean lawsuit won’t have nearly the effect that the China suit did. It’s a smaller market, so the effect will be significantly reduced. LG and Samsung are international market players; the domestic market is nothing like China’s.

Third, QCOM is already pivoting. It is looking for more opportunities beyond smartphones and making significant progress. The Internet of Things (sensors that connect devices to devices), data centers and connected cameras (think GoPro (GPRO) devices) are three sectors where QCOM stock is making great headway and where there is more growth ahead than behind.

And another thing to bear in mind: It’s very likely QCOM will be the guts inside the new iPhone 7 when that launches as well.

All that and the stock is yielding 3.7% currently.

While there’s still risk, most of it has been priced in at this point; but if you want to be conservative, buy in over time and let dollar cost averaging work for you.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/china-woes-make-qcom-bargain/.

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