Qualcomm, Inc. (QCOM) Stock Has Yield, But It’s Not Worth the Pain

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This year has certainly been brutal for Qualcomm, Inc. (NASDAQ:QCOM), whose shares are off nearly 20%. Unfortunately, this is nothing new. Since 2014, QCOM stock has been in a downward spiral. During this period, the company has lost over $40 billion in market cap.

Qualcomm, Inc. (QCOM) Stock Has Yield, But It's Not Worth the Pain

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Yet might there be a value play here with QCOM stock? Or is this really just a value trap?

There are certainly bullish factors to consider. First of all, Qualcomm continues to innovate and to set critical global standards for the mobile industry. Supporting all this is one of the most extensive patent portfolios in the world.

More Bullish Signals for Qualcomm?

QCOM is also getting lots of traction in key markets like China. For example, there remains substantial demand for Snapdragon 600 and 800 chips, which help customers tap the benefits of artificial intelligence.

At the same time, QCOM stock sports an attractive dividend, which is at 4.4%. Over the years, the company’s management has definitely been shareholder friendly.

All this is definitely great, right? Sure. But I think investors should remain cautious. And the reason is: The lucrative business model is in jeopardy. QCOM generates about 80% of its profits from licensing its technology. The result is that the company has been able to grow revenues at a robust pace but also generate strong margins, as there is fewer resources required for manufacturing chips.

Yet many customers are not happy with this. Keep in mind that QCOM generally charges a royalty that is a percentage of the price of a phone. In fact, the company usually gets a fee even if the technology is not used! Because of this, the costs can be steep for customers.

This is why Apple Inc. (NASDAQ:AAPL) lobbed a $1 billion lawsuit against QCOM earlier in the year. And while this amount is fairly minimal, the overall impact on QCOM could be devastating. In other words, AAPL wants to undue the business model.

As should be no surprise, the company has been aggressive. Consider that it has encouraged its partners not to pay the royalties and will provide complete indemnification. So during the latest quarter, the licensing revenues plunged by a grueling 41% to $1.2 billion.

In the meantime, AAPL has been cozying up to Intel Corporation (NASDAQ:INTC), which snagged a deal to provide chips for the iPhone 7. There is also buzz that a distribution deal could be in the works for the upcoming new models, which will likely come onto the market in the fall.

Yet APPL is not the only problem for QCOM stock. The company is facing a string of antitrust complaints in the U.S., Korea and Europe.

Bottom Line on QCOM Stock

To deal with the challenges, Qualcomm has been smart to leverage its balance sheet to offer $47 billion for NXP Semiconductors NV (NASDAQ:NXPI). The company is a leader in next-generation technologies for autos and Internet of Things systems.

But unfortunately, the deal is running into headwinds as European regulators have been scrutinizing the transaction. What’s more, several major shareholders of NXPI are agitating for a higher valuation.

However, even if the acquisition does go through, I still think QCOM stock will continue to struggle. The litigation with AAPL is likely to continue for some time and the company appears intent to play hardball. The governmental antitrust cases will also likely be a slog.

Besides, the valuation on QCOM stock is not necessarily cheap, with the price-to-earnings ratio at about 17X. So even with attractive dividend, the shares are really not worth the risk right now.

Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/qualcomm-inc-qcom-stock-not-worth-pain/.

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