Finally, some good news for Qualcomm, Inc. (NASDAQ:QCOM). After reaching a 52-week low in September, amid a battle with Apple Inc. (NASDAQ:AAPL) and concerns about the mobile space, the QCOM stock price has soared. Qualcomm stock has gained about 33% just since late October.
The driver, of course, has been acquisition interest from Broadcom Ltd (NASDAQ:AVGO). Broadcom has offered $70 per share for Qualcomm, an offer that was quickly rebuffed. But Broadcom since has reiterated its commitment to doing a deal, which likely means a higher bid is on the way at some point.
If that deal comes, Qualcomm should take it. On its own, Qualcomm still has plenty of challenges and plenty of concerns. A sale in the $75-$80 per share range might seem like a disappointment, given that the QCOM stock price was above $80 back in 2014. But in this environment, a ~50% or higher premium to recent levels seems like a win for QCOM shareholders.
Taking the Broadcom Deal
Broadcom’s takeover for Qualcomm, at the rejected offer price, would be a $130-billion deal, the largest tech acquisition ever. But even that won’t be enough.
In the release announcing its decision, Qualcomm cited two key points. The first was that the $70 per share offer “dramatically undervalues” the company. Second, Qualcomm wrote that such a deal “comes with significant regulatory uncertainty.”
On the first point, I’m somewhat skeptical. I’ve been a long-time bear on QCOM stock — admittedly, that case doesn’t look great at the moment — and the risks here seem to support a valuation below even the current price. This is a company coming off a fiscal 2017 where year-over-year revenue declined 5%, and net income dropped 4%.
Admittedly, the feud with Apple and the withheld royalties from both that company and Chinese customer Huawei had an impact. But it’s far too optimistic to see the Apple issues as a one-time event. Other tech giants have taken Apple’s side. Speculation persists that Intel Corporation (NASDAQ:INTC) modems will replace Qualcomm in the iPhone going forward.
There’s already been regulatory action in Korea and China, along with a U.S. probe. Qualcomm had to pay BlackBerry Ltd (NYSE:BB) $975 million to settle another dispute. Risks to the company’s actual business model are increasing.
Getting 17-18x FY17 adjusted EPS in a market where INTC trades for ~14x net earnings and Micron Technology, Inc. (NASDAQ:MU) for ~7x seems like a win.
Would a Deal Go Through?
Of course, the question is whether such a deal would pass regulatory muster. That’s likely one reason the QCOM stock price remains well below the rejected offer, even with another bid likely on the way.
Both parties already have dealt with antitrust-related delays. Qualcomm’s acquisition of NXP Semiconductors NV (NASDAQ:NXPI) has been closely watched by European regulators. As Dana Blankenhorn pointed out on this site, Broadcom’s acquisition of Brocade had to pass a lengthy CFIUS (Committee for Foreign Investment in the United States) review.
Of course, as Blankenhorn also detailed, Broadcom CEO Hock Tan met personally with President Donald Trump recently, amid his company’s move from Singapore back to the U.S. That could provide an instant benefit in the event Qualcomm does take a raised offer.
Given the worldwide nature of both companies, however, it’s not just U.S. regulators that can scuttle a buyout, should it happen.
Take Profits in QCOM Stock?
From here, it looks like Qualcomm’s wisest path is to take a Broadcom offer and hope it goes through. The company is bullish on its prospects in 5G, and the asset-light model is attractive from a long-term standpoint.
But, again, there’s still a risk that model is going to have to change over the next few years, if Qualcomm goes it alone. And that can be nothing but bearish for the QCOM stock price. A bird in the hand is better than two in the bush. A $75-$80 price looks better than the company’s prospects in an environment where global smartphone growth is decelerating.
As far as QCOM stock goes, this looks like a spot to “sell the news.” A higher bid isn’t guaranteed, and it’s even less likely Qualcomm would accept a bid. From there, a lengthy regulatory review could end the deal at any time. And yet, going it alone doesn’t seem terribly attractive, either, as a confirmed end to the negotiations would be seen as a negative for QCOM stock.
I’m simply not sure there’s a great option for Qualcomm, given the challenges in a deal and in going it alone. But, forced to choose, I’d argue that Qualcomm should take the money and run. So should QCOM stockholders.
As of this writing, Vince Martin has no positions in any securities mentioned.
