Various mega tech firms have pulled off impressive rallies this year, such as Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN).
A big part of this has been the enthusiasm about the continued growth in major categories like mobile, cloud-computing, online video and social media. Yet the rally has been fairly concentrated. If anything, there are many notable tech companies that have been left out of the party.
And a prime example is Qualcomm, Inc. (NASDAQ:QCOM). No doubt, the company has many positives, such as an extensive patent portfolio, a global customer base and a leading position in promoting technology standards in the mobile industry. QCOM stock is also relatively cheap, with a forward price-earnings ratio of only 13. There is also an attractive dividend yield of 4.1%.
That said, I think it’s a stretch to say that Qualcomm might join the bullish trend. For the most, QCOM faces some major challenges, such as the following:
QCOM Stock Issue #1 – Mobile Maturation
There are signs that the the mobile market is maturing. According to a research report from CCS Insight, smartphone sales in North America and Europe are likely to hit “peak” levels this year.
Granted, there should still be growth in emerging markets. But the problem is that average prices for devices are much lower because of the meager income levels.
As for Qualcomm, the company has actually been under pressure for some time because of the changing market conditions. Keep in mind that — from fiscal 2013 to 2016 — revenues went from $24.87 billion to $23.6 billion.
Now it’s true that QCOM has been investing in next-generation technologies, such as with 5G systems and the Internet of Things (IoT). Yet such things are still in the early phases — and will likely take considerable time to make an impact on the top line.
QCOM Stock Issue #2 – NXP Acquisition
To deal with the growth problems, QCOM has agreed to shell out $47 billion for NXP Semiconductors NV (NASDAQ:NXPI). With the deal, the company will become a top player in the fast-growing market for chips used in connected vehicles.
But the transaction is fraught with risks. First of all, the acquisition will be the largest in QCOM’s history and take up a substantial amount of the cash balance.
At the same time, there are likely to be major challenges with integration. Not only will QCOM be entering a highly competitive market, but also be taking on a different business model. After all, NXP manufacturers its own chips — across 14 foundries — whereas QCOM outsources much of its production.
Finally, NXP is more than just about autos. The company, unfortunately, has several businesses that are in slow-growth categories. For example, during the last quarter, overall revenues actually fell by 1% to $2.211 billion.
QCOM Stock Issue #3 – Litigation
When it comes to QCOM stock, the biggest worry is the core business model. Consider that the company essentially gets a percentage of the pricing of nearly all smartphones sold!
As a result, there are concerns that this is exorbitant — and perhaps unfair and anti-competitive. In fact, the Chinese government has already won a $975 million settlement against QCOM. But there are also pending legal actions in the U.S., Europe and Korea.
Then there is Apple, which has recently sued QCOM for $1 billion and has gone on to withhold royalty payments. No doubt, the company has tremendous resources as well as leverage with many suppliers. Interestingly enough, QCOM has reduced its guidance because of AAPL’s move.
Note that the licensing business for QCOM accounted for $6.5 billion in pre-tax earnings last year, compared to $2.2 billion for the rest of the other operations. In other words, if the legal actions ultimately result in lower royalty payments, the impact could be severe for the company.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
