Last month, QUALCOMM, Inc. (NASDAQ:QCOM) was a $53 stock and I was largely neutral on the name. Now, QCOM stock trades at $66 and I’m bullish.
Why the sudden change? Broadcom Ltd (NASDAQ:AVGO) really, really wants to buy QCOM. And the takeover price will likely be far above $66.
Granted, there is no guarantee of an acquisition actually going through. Plus, the process will likely be lengthy, complicated and come under scrutiny from antitrust regulators.
That being said, the risk-reward profile on QCOM stock skews towards the upside at these levels. I think QCOM’s standalone value is 20% below the current stock price. Meanwhile, QCOM stock could get taken out a near 30% premium. Given Broadcom’s persistence in the deal thus far, it is also more likely than not this deal does go through.
That combination makes QCOM stock a good trade here and now.
Why Broadcom Will Likely Make an $80-Plus Offer for QCOM Soon
In early November, there was chatter on the Street that Broadcom was going to make a huge takeover offer for Qualcomm.
Then, on November 6, Broadcom pulled the trigger and a made a formal offer for QCOM. The $130 billion cash-and-stock deal was the biggest buyout offer in tech. Ever. The offer put QCOM’s takeover stock price at $70, $60 of which would be cash and $10 of which would be AVGO stock.
QCOM didn’t like the deal. They felt that the $70 takeover price significantly undervalued the company. Consequently, Qualcomm’s Board of Directors unanimously rejected the offer.
This move was widely expected. Many analysts weighed in and said $70 seemed like a low price to pay in this situation.
QCOM as an $80 stock back in 2014 before legal concerns with Apple Inc (NASDAQ:
AAPL) started to weigh on sentiment and operations. A deal with AVGO could make those concerns go away, since AVGO and AAPL have a closer relationship than the strained one between QCOM and AAPL. Most analysts and investors are talking about a takeover price between $80 and $90.
It looks as if AVGO will indeed make that offer. Following Qualcomm’s rejection, AVGO released a statement saying they are “fully committed” to acquiring QCOM. They also said that the acquisition stands regardless of how QCOM’s acquisition of NXP Semiconductors NV (NASDAQ:NXPI) plays out.
Overall, then, it looks fairly likely that AVGO will make an $80-plus offer for QCOM stock in the near future.
Why QCOM Stock Is a Buy Here
Takeovers are usually a wild card.
This one has a little less “wild” in it.
AVGO has already made an unsolicited offer. And they look determined to get to a price both companies will agree on. That price is likely somewhere between $80 and $90.
The “wild” here will come from antitrust concerns.
Investors need to look no further that QCOM’s most recent headline acquisition to understand the risks to a AVGO buyout. It has been more than a year since QCOM agreed to buy NXPI for $38 billion, and the deal still hasn’t closed. The European Commission has put its review of the merger on hold.
It is never a good sign in M&A to see things get dragged on like that. It lessens the likelihood of a deal closing.
Thus, I peg the chances of a QCOM takeover at $85 per share at somewhere around 70%. I also maintain that the standalone value of QCOM stock is $52, and that there is a 30% chance shares head back to that level.
That combination implies favorable risk-reward asymmetry on QCOM stock until about $75.
Bottom Line on QCOM Stock
Given Broadcom’s persistence in the deal thus far, it looks like a higher bid is in the cards. That bid will likely come in around $85.
When that bid does come in, QCOM stock will rally. That is why QCOM stock looks like a good trade here and now.
As of this writing, Luke Lango was long QCOM.
