Is Qualcomm, Inc. (QCOM) Stock Screwed? It Doesn’t Look Good

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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.

Is Qualcomm, Inc. (QCOM) Stock Screwed? It Doesn’t Look Good

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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.

Minding QCOM Stock

Despite these issues, some may wonder whether now is the time to buy QCOM stock. On the plus side, shares yield almost 4.4%. However, forecasts aren’t very bright.

Taking out the issues surrounding the Apple case and the NXP deal for a moment, there’s another problem: valuation. QCOM stock trades with a forward price-to-earnings ratio of 15.5. Admittedly, this is not an egregious valuation, but it’s not blatantly cheap either.

In fact, that forward-looking valuation seems kind of expensive when looking at the estimates. Analysts are calling for a 1.9% contraction to sales in 2017, followed by a 1.4% contraction in 2018. Earnings forecasts call for a 6.3% decline this year and a whopping 18.8% decline in 2018.

Many estimates are predicated on uncertainty surrounding the Apple case and I get that. There could be upside and Qualcomm stock may be setting up as a big buy right now. But I’m not in the legal business and I’m not going to be betting on the outcomes.

Put simply, here’s what I see right now:

  • QCOM needs NXPI, a deal that seems increasingly likely to get more expensive. The alternative is a “no deal,” which is a worse outcome than paying a higher premium.
  • An ongoing litigation with the largest company on earth.
  • A 15.5x forward P/E ratio with earnings and sales estimates calling for declines in 2017 and 2018.

If the stock were cheaper, it’s one I could consider. Unfortunately, it has issues and QCOM stock isn’t cheap.

While there are positive potential outcomes, I’d rather wait on Qualcomm stock and park my money in other stocks. If I’m looking for dividends, I’ll be looking at these stocks.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/qualcomm-inc-qcom-stock-screwed/.

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