Ever since Qualcomm, Inc. (NASDAQ:QCOM) lost its arbitration case against BlackBerry Ltd (NASDAQ:BBRY) in April, investors have been looking beyond the bad news. At a 14x forward price-to-earnings ratio, the complaints against QCOM are more than priced in the share price.
Paying investors a dividend yielding 3.9% (the stock trades at ex-dividend on May 26) helps limit the downside. Fundamentals are improving, with only one more hurdle left. The market is waiting on the EU decision by June 9 on Qualcomm’s buyout of NXP Semiconductors NV (NASDAQ:NXPI).
QCOM Stock’s NXPI Buyout
Although the U.S. approved the deal on April 4 (shareholders accepted the deal in January), the E.U. may potentially impose some restrictions. But if the EU is more concerned about Brexit and the French elections, it may just let the deal go through. In the near-term, though, investors may care more about QCOM’s tussle with Apple Inc. (NASDAQ:AAPL).
Apple stopped paying royalties to Qualcomm but Qualcomm fought back. On May 17, it filed a breach of contract complaint against Apple’s manufacturers.
QCOM has an edge with the filing. Though it cannot stop the production of this year’s iPhones, it could make 2018 difficult for Apple. Apple is playing a dangerous game against its former ally. Qualcomm has a solid OFDMA patent portfolio. But Samsung (OTCMKTS:SSNLF) and Intel Corporation (NASDAQ:INTC) filed briefs that support the FTC’s complaint that Qualcomm monopolized a key device.
Despite the filing against Apple’s manufacturers, QCOM still views Apple as an important customer. On its conference call, QCOM touted its strengths in the latest technology, including LTE and 5G NR. It said:
“We are optimistic about the speed of innovation in the modem and RF areas with technologies such as gigabit LTE, 5G NR, multimode and millimeter wave becoming increasingly important. Considering the strength of both our product roadmap in R&D investments, we expect to continue to be an important supplier to Apple now and into the future.”
In the Q2 report, Qualcomm excluded in its revenue forecast over $150 million owed in the Dec. quarter in unpaid royalties.
Intel Falls Behind Qualcomm
Qualcomm has an array of intellectual property in 3G, 4G, and GSM. As 5G cellular technology becomes mainstream, Intel will fall further behind.
For years, Intel failed to catch up to Qualcomm’s modem technology. QCOM stock still has better modem performance. It already announced in February it sampled 5G, months ahead of schedule. Late last year, it expected testing would begin in the second half of 2017.
Outlook and Forecast
Qualcomm expects OEMs will announce the adoption of its 205 mobile platform designs for 4G LTE connectivity. Carriers are launching the very fast Gigabit LTE worldwide. This gives it an edge over other network suppliers. Despite these expectations, shares are still nearly 20% below yearly highs. In 2019, QCOM expects launches for commercial products for 3GPP-based 5G radio connections in 2019.
Shipments for 3G and 4G totaled 400 million units in the last quarter. Qualcomm expects shipments will grow to 1.75 billion to 1.85 billion devices this year.
Takeaway
The company has limited revenue visibility until it and Apple resolve their differences. Since the market priced in the downside in QCOM stock, any judgment that favors Qualcomm will send the stock sharply higher. Value investors should consider this stock now that it trades below 20 times earnings.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
