It has been a struggle trying to decide what the real value of semiconductor Qualcomm, Inc. (NASDAQ:QCOM) should be. But with breathtaking earnings results coming in from Nvidia Corporation (NASDAQ:NVDA), there’s no reason why Qualcomm can’t do the same, and why QCOM stock can’t resume its run back to the $70 mark.
While the bad news — including its royalty dispute with Apple Inc. (NASDAQ:AAPL) — has hurt Qualcomm to the tune of 15% year-to-date, I expect shares to deliver 26% returns in the next 12 to 18 months.
QCOM stock has been under pressure primarily because the company last month announced that it has been informed that Apple would withhold payments to its contract manufacturers for the royalties those contract manufacturers owe.
“Apple is improperly interfering with Qualcomm’s long-standing agreements with Qualcomm’s licensees,” said Don Rosenberg, executive vice president and general counsel. “These license agreements remain valid and enforceable.”
Apple, however, insists that until its dispute with Qualcomm is resolved, it will continue to withhold payment. It’s for this reason that QCOM had reduced its fiscal third quarter 2017 guidance, cutting revenue to a range of $4.8 billion to $5.6 billion from $5.3 billion to $6.1 billion prior.
Reasons to Like QCOM Stock
Nevertheless, with its industry-leading patents, Qualcomm shares look like a bargain, especially from a risk-versus-reward perspective.
QCOM now trades at less than 12 times cash-adjusted earnings. And not only does the company has a strong balance sheet — which includes some $10 billion in cash and another $6 billion on operating cash flow — to lean on, but the stock also pays a robust dividend yield of 4.2%, which is more than twice the S&P 500 index.
What’s more, there’s also Qualcomm’s pending $47 billion acquisition of NXP Semiconductors N.V. (NASDAQ:NXPI) to be excited about — a deal that should give QCOM an expanding footprint in high-growth areas such as internet of things , automotive, security and networking.
These factors, along with the better-than-expected earnings results released last month to put QCOM stock on a steady rebound as the year progresses.
And although the company’s first-quarter revenue of $5.9 billion fell short of Street estimates, Qualcomm shipped shipped 331 to 335 million 3G/4G handsets in the quarter, which was up 8% year over year. While the average selling price of the 3G4G handset — with in-built Qualcomm chipset — was around $186 to $192, down 4% year-over-year, that was still much higher than analysts expected.
Elsewhere, the Qualcomm Technology Licensing segment generated revenue of $1.81 billion, up 13% year over year, and reported quarterly EBIT margin of 85%. During the quarter, QCOM returned about $1.2 billion to shareholders, which includes $784 million in dividends and another $444 million through buybacks of 6.6 million shares of common stock.
In other words, while its earnings results weren’t breathtaking, Qualcomm is doing enough to regain credibility as a dominant semiconductor company it was once known to be.
Bottom Line for Qualcomm
To be sure, there are still plenty of risks with QCOM stock. But its forward earnings multiple of 13 suggest barely zero growth. When adjusting out its cash, that multiple is closer to single digits.
Assuming its deal for NXP closes, as with most analysts expect, Qualcomm will have a way to better diversify away from the weakening smartphone market, and QCOM should sustain its current uptrend toward of $70 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.