Qualcomm, Inc. (QCOM) delivered some good news for the first time in ages Wednesday, and with some potential catalysts on the horizon, the ensuing rally in QCOM might just mean the beaten-down stock has at long last become a buy.
The spark for QCOM’s big move — shares jumped more than 8% at the opening bell — was the announcement of a new licensing deal with a red-hot Chinese smartphone maker.
Xiaomi Technology makes high-quality smartphones at cheaper prices, which has allowed it to emerge as a serious alternative to handsets from Apple (AAPL) and Samsung (SSNLF), among others. Indeed, the privately held company is now the worlds fourth-largest manufacturer of smartphones.
The QCOM licensing pact allows Xiaomi to use the chipmaker’s patents to make and sell 3G and 4G devices. Although this is hardly the answer to all of QCOM’s problems, it does lend support to the argument that the worst is at long last behind it.
Qualcomm stock was off 34% for the year-to-date before Wednesday’s rally, slammed by a seemingly endless stream of negative developments. Among the hits:
- Qualcomm was shut out of making chips for Samsung’s Galaxy S6 flagship smartphone.
- The company paid an antitrust fine to China of almost a billion dollars.
- South Korea initiated its own antitrust investigation.
- Qualcomm said it’s struggling to collect royalty fees from smartphones sold in China.
Renewed Hope for QCOM Stock
Given the company’s problems with getting Chinese smartphone makers to honor their licensing deals, it’s a bit ironic that the Xiaomi pact could be the inflection point investors have been waiting for — but there it is.
The chipmaker needed to show the market that it can do something — anything — right to make the case that Qualcomm stock is a beaten-down bargain. If nothing else, the Xiaomi news makes other potential positive developments seem like less of a stretch.
For example, Qualcomm could conceivably win back its position with Samsung as the gadget maker gears up for its next flagship phone. Perhaps QCOM will work out a settlement with South Korean regulators and the removal of uncertainty will give shares a lift. And, despite competition, analysts expect QCOM to retain its baseband modem slot in the next iPhone.
In perhaps the most important catalyst of all, Qualcomm is debating the merits of splitting the company in two. The market will almost certainly reward such a break-up, should it come to pass.
Shares are inexpensive on a forward-earnings basis, and free cash flow is strong, but the sentiment on QCOM stock has been that it’s cheap for some very important reasons.
The Xiaomi deal could change that perception, which would lead to multiple expansion. A little more good news would amplify that multiple expansion. Don’t be surprised if Qualcomm stock goes on a nice, long run.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
