For the next while, investors will eye shares of Qualcomm, Inc. (NASDAQ:QCOM) as the company continues to press forward its NXP Semiconductors NV (NASDAQ:NXPI) acquisition and protect its IP portfolio against Apple Inc. (NASDAQ:AAPL). The uncertainty on both fronts is creating a discount for QCOM stock.
On July 27, Qualcomm extended its cash tender for shares of NXPI. Even though NXPI shareholders who collectively hold up to around 7.6% of the shares have not tendered the stock, this group of shareholders will not be the reason for the takeover delay.
On July 7, Qualcomm faced a setback for its antitrust activities when it lost an appeal against the EU. Its failure to give the regulators information after the decision will cost the company $665,000 a day. Qualcomm said the EU’s demands already cost the company over 3 million euros, 50 employees and 16 external advisors.
Fortunately for investors, the case the EU has against Qualcomm does not have any correlation to the odds that Apple will win against it in the courtroom. Manufacturers are simply looking for a way to pay lower royalty rates to cut its production costs.
Qualcomm has decades of experience managing its IP portfolio to many smartphone producers. It responded to the consortium of critics, stating that they are waging a “coordinated effort aimed at misdirecting” trade regulators.
Qualcomm wants iPhones using Intel Corporation (NASDAQ:INTC) modems banned. Strategically, it wants to keep supplying QCOM chips to Apple, which would cut Apple’s reliance on alternatives.
Should the chip giant successfully win its case against Apple, Apple will be on the hook to pay the royalties owed. For now though, QCOM stock is not trading as if the courts will make a ruling in its favor. At a forward price-earnings ratio of roughly 16, the market is pricing in lower royalty rates.
Growth Ahead
Markets are also forgetting about the strong prospects for Qualcomm in the quarters ahead. It is investing in 5G and preparing for IoT markets after the NXPI acquisition. In the current fourth quarter, Qualcomm will meet the demand levels for Snapdragon 835 chips.
The global smartphone industry will continue growing this year. Global average selling prices (ASP) are stable, while ASPs in China will go up. Strong demand for Snapdragon 600 chips in China will keep prices from deteriorating in the region. Snapdragon 800 chips are also well-received in China due to interest for “AI mode” from customers.
Qualcomm is establishing its 5G technology in China. Carriers want customers to have the fastest technology when it is available. By adopting 5G ahead of other countries, China will make sure that it does not fall behind.
In the near term, 5G will need carriers spending to get the technology ready. As early as next year, customers will start testing 5G. A commercial launch of the faster network technology will probably start in around two years’ time.
Bottom Line on QCOM Stock
Markets are highly uncertain that the courts will uphold Qualcomm’s royalty rates with Apple. Few investors have the legal expertise to even predict who will win the case. But if the court rules in Qualcomm’s favor, the stock will rebound back to yearly highs in the $60 to $70 range.
In the meantime, the longer it takes for Apple’s case against Qualcomm to resolve, the more likely it is that the stock will drift lower. At a price of around $53 a share, QCOM stock may find new lows in the week ahead.
While the dividend yielding over 4% is not supporting the share price, value investors may consider buying the stock to collect the additional income.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
