So far this year, the NASDAQ 100 Index is up more than 21%. Many semiconductor stocks have done even better. QUALCOMM, Inc. (NASDAQ:QCOM) isn’t one of them. Very surprisingly, QCOM stock is down nearly 19%.
Meanwhile, NVIDIA Corporation (NASDAQ:NVDA) has returned a whopping 63% thus far in 2017. Texas Instruments Incorporated (NASDAQ:TXN) is up a respectable 10% matching the market (S&P 500 Index) average.
That’s some horrible performance for QCOM stock, and even worse compared to the technology-laden NASDAQ index. Active investors holding the shares are crying in their soup so far this year.
Investors following Qualcomm closely are aware of two significant company-specific matters that are holding the stock back. Neither is expected to derail Qualcomm’s long-term investment appeal. And one in particular could prove a game-changer to send QCOM stock firmly forward in the coming years.
A nasty licensing dispute with mobile phone titan Apple is the primary culprit holding the shares hostage to any imminent move upward. Last week’s third-quarter earnings results demonstrated the extent that the spat is hitting near-term results.
Sales fell 11% to $5.4 billion but would have been roughly $1 billion higher were it not for the fact that Apple’s contract manufacturers did not pay royalties to Qualcomm related to the sale of Apple iPhones.
Apple is disputing the amounts of royalties and license fees it has to pay Qualcomm, which controls important patents on phones that operate on 3G and 4G wireless networks. At some point Apple will pay what it owes QCOM, but in the near term it is distorting financial results.
Apple is certainly playing hardball, and somewhat surprisingly still holds a special place in consumer hearts and minds.
The second matter surrounds Qualcomm’s pending acquisition of NXP Semiconductors NV (NASDAQ:NXPI). Management still expects the deal to close this year, but the approval is caught up in review by EU antitrust regulators. The consensus of analysts and observers is that the deal will close, eventually — even this year as management expects.
The NXP Semi deal was announced last October with a purchase price of $38 billion in cash, or just over half of Qualcomm’s current market capitalization of $79 billion. In other words, NXP Semi will have a material impact on reducing Qualcomm’s dependence on mobile phone licenses and semiconductor sales.
Internet of Things
NXP Semi sells chips to a much wider array of industries. These include automotive, wireless networks, industrial, as well as consumer and computer devices and networks. A key reason that NVIDIA’s stock has caught fire is exposure to self-driving cars in the auto space. Increased exposure to the Internet of Things (IoT) excites investors, and NXP Semi offers exposure to chips that help serve IoT networks.
NXP Semi thinks it can grow earnings 15% annually going forward. This would help jump start Qualcomm’s growth prospects, which have been dismal over the past three years. Over this period, annual sales and profit growth are negative. But again, the Apple dispute is masking what would be stronger financial results.
The past 10 years has been much more kind to Qualcomm. Sales are up 12% and earnings having grown more than 10% annually over the last decade. It is also generating billions in excess free cash flow, which should continue in the core business despite Apple’s best efforts to derail its royalty business.
NXP Semi is averaging closer to 20% sales growth and its annual free cash flow production is up to nearly $2 billion. Qualcomm’s proposed purchase price is nearly 20 times this cash flow production, but growth in the chip space is at a premium these days. Just ask industry juggernaut Intel Corporation (NASDAQ:INTC).
Analysts are still in the early stages of modeling out the financials of a combined Qualcomm-NXP Semi. But on a standalone basis, neither is richly priced. Qualcomm is trading at less than 13 times forward earnings. NXP Semi trades at a forward P/E below 18, which again is reasonable in the context of its higher growth prospects.
Bottomline for QCOM Stock
QCOM stock also boasts a current dividend yield of 4.1%, or nearly double the market average. The combination of a reasonable valuation, high yield, and increased growth prospects once NXP Semi is folded in suggest a compelling value play. It could also zig upwards once the Apple dispute ends.
In the meantime, the market could zag downward after an historic rally that started last November following the Presidential election results. QCOM stock investors are also getting paid to wait for inevitable arrival of sunnier days in the future.
As of this writing, Ryan Fuhrmann was long shares of Intel.