It has been a tough year for Qualcomm, Inc. (NASDAQ:QCOM). After plunging in January, QCOM stock continues to struggle. Trading near $52, shares are about $1 above its 52-week lows and are down about 20% on the year. Still, it’s not time to go long.
First, the company has an ongoing litigation against Apple Inc. (NASDAQ:AAPL).
Long story short, in January, Apple sued Qualcomm for $1 billion as the former alleged that the latter was charging royalties it shouldn’t have. Then in May, QCOM began pushing back, saying Apple’s manufacturers weren’t paying royalties at the encouragement of Apple.
Who wins? It doesn’t matter. If it’s Apple, Qualcomm will get hurt. If QCOM wins, it’s still losing in the interim. This is a bad situation to be in. Apple is a behemoth customer and I know I wouldn’t want to have a litigation with one of my biggest customers. Despite the future implications of the litigation, the case is hurting Qualcomm’s financials in the present time.
I’m not saying Qualcomm’s side doesn’t have merit, but right now it’s hurting the business.
QCOM Stock: M&A With NXP Semiconductors
Perhaps a larger issue with QCOM stock is NXP Semiconductors NV (NASDAQ:NXPI). In October 2016, QCOM came to terms with NXPI to buy the company for $48 billion or $110 per share. However, shares were recently trading at $113 — $3 above Qualcomm and its tender offer.
Shares don’t usually trade over the offer price unless investors believe a higher price is on the way. If Qualcomm isn’t able to get more investors to tender, it may need to raise its price target. Notably, Morgan Stanley analysts did just that, boosting their price target to $117.50 on NXPI stock.
QCOM is also struggling to gain E.U. approval for the deal and it’s starting to cost a lot of money.
The bottom line with NXPI? Qualcomm, assuming it can gain regulatory approval, will seemingly have to increase its offer price. While that won’t be devastating, it will still be a major cost.
The other option would be to drop its bid for NXP Semiconductors. This would be a bad move in my opinion. Although NXPI didn’t report the greatest quarterly results this quarter, it’s still a high quality semiconductor company.
Specifically, its automotive business is a big one. Boasting record second-quarter revenues, the segment put up $938 million in sales, up 9% year-over-year. In the same quarter, QCOM saw revenue fall 12% YoY.
Looking forward though, it’s more important from a diversification standpoint. Qualcomm is a big player in the smartphone game, but smartphone growth is near zilch. Acquiring NXPI gets it into a new growth arena and allows for a more diverse portfolio of businesses. This would be an important step for QCOM and it would be foolish to lose the NXPI deal.