Ever since Broadcom Ltd (NASDAQ:AVGO) launched a hostile takeover effort of fellow chip-maker Qualcomm, Inc. (NASDAQ:QCOM), my stance on QCOM stock has turned from bearish to bullish.
Why?
It is simple. Shareholders now have all the power now (barring regulatory hurdles).
Before, Qualcomm stock was victim to Apple Inc (NASDAQ:AAPL). The company that made Qualcomm stock boom with the iPhone has recently become a Qualcomm adversary. Apple has been accusing Qualcomm of running a monopoly and keeping prices for its chips artificially inflated.
The stakes of these accusations are pretty high: Qualcomm and Apple might not continue to do business together into the future, while billions of dollars in fines could be handed down.
That negative narrative clouded QCOM stock for the longest time. It turned this should-be-a-winner stock into a loser.
But with AVGO stepping in and shaking things up, shareholders have all the power.
Either QCOM shareholders approve Broadcom’s board nominees, and AVGO buys QCOM for what will likely be $75 per share (10% upside in a relatively near-term time frame). Or QCOM shareholders don’t approve the nominees, in which case shareholders are placing faith in QCOM management’s ability to get earnings to $6.75 per share in 2019.
In such a scenario, QCOM could be worth more than $80 in a year (18% upside in 12 months).
That is a win-win scenario.
Consequently, even though QCOM has simply been range bound for the past several months, I think this is a name you stick with into the March 6 annual meeting.
Why QCOM Is a Win-Win Here
March 6 is the date every QCOM shareholder should have circled on their calendars. That is the date of QCOM’s annual meeting. Shareholders will vote on whether to support QCOM or AVGO’s board nominees, thus deciding the fate of QCOM stock.
In my opinion, there are two ways this plays out.
One way is that shareholders approve AVGO’s board nominees, but with the caveat that AVGO ups the takeover price. AVGO will likely do this because they really want to buy QCOM as it is the biggest piece in their chip industry consolidation plans.
The new takeover price offered by AVGO won’t be that big. The company has never paid more than 7% above its initial offer to buy a company. But given how important QCOM is to AVGO’s plans, they will likely come back with a $75 offer (a 7% premium on the original $70 offer).
QCOM stock currently trades at $68. That means there is 10% upside potential in the stock over the next several weeks.
The other way the annual meeting plays out is that shareholders approve QCOM’s board nominees, thus turning back AVGO. That would be a vote of confidence in QCOM management’s ability to right what has been a sinking ship in a booming industry.
Recently, QCOM management released a letter to shareholders saying that if they were to reject the AVGO bid, the company would commit to get earnings per share to $6.75 by 2019. That is a big number. This year, earnings are expected to be around $3.50.
If shareholders vote in favor of QCOM, they are basically saying that $6.75 is where earnings should be in two years. QCOM stock usually trades around 13-times forward earnings.
I don’t think QCOM will get that type of multiple for a stretch earnings target of $6.75, but a 12-times multiple does put the stock above $80 in a year while an 11-times multiple puts it right around $75.
With QCOM currently at $68, that translates into a 10% to 18%-plus rally over the next 12 months.
Either way you look at this, QCOM should be a winner for shareholders buying at these prices.
Bottom Line on QCOM Stock
Stick with the stock into the March 6 annual meeting. This hostile takeover saga will likely end favorably for shareholders.
As of this writing, Luke Lango was long QCOM.
