For a company facing an uncertain future, analysts of Qualcomm, Inc. (NASDAQ:QCOM) seem pretty certain the stock is a buy. Qualcomm stock is seen as a bargain in the recent tech wreck, “the best value out there.”
Our Chris Tyler suggests that a “bullish fence” strategy, using options, gives you a great chance to enjoy the upside. This is despite a host of problems, most of which are of CEO Steve Mollenkopf’s own making.
These include his ongoing fight with Apple Inc. (NASDAQ:AAPL) over royalties brought in Broadcom Ltd (NASDAQ:AVGO) as a “white knight.” The Administration saved Mollenkopf’s job by nixing that deal at the last minute (even after Broadcom moved its head offices to the U.S.) and long-term shareholders are angry.
Why the Anger?
You can see it in the Qualcomm stock chart, an EKG going back five years in which momentum has been regularly quashed. At their opening price April 5 of about $55 per share, Qualcomm shares cost less than they did in 2013.
Apple’s decision to withhold royalties means that, while Qualcomm brought $5.3 billion to the net income line in 2015 on $25.3 billion of revenue, a margin of 20%, it barely operated at break-even during the last quarter, taking a loss of nearly $6 billion by paying income taxes early in anticipation of the tax cut.
The Apple battle has become Mollenkopf’s Vietnam, with peace elusive, as Apple tries to shift the battleground and its success in bringing the Federal Trade Commission to deliver what could be a decisive blow.
Mollenkopf, who successfully fought efforts to cut royalties from China and Korea, is now in a war he may be unable to win. Apple is big enough to make its own chips, and it has the patent power to go toe-to-toe with Qualcomm, even if it can’t exclude it completely.
Qualcomm Needs Friends
What Mollenkopf can use right now are some friends, but years of playing hardball means they are in short supply.
During the most recent quarter, Qualcomm was unable to count $740 million in royalty revenue now in dispute. It faces a $1.2 billion fine from the European Union, an $868 million charge from Korea and a $778 million charge from Taiwan over its business practices.
Qualcomm still hopes to buy NXP Semiconductors NV (NASDAQ:NXPI), which it moved for as part of its effort to fight off Broadcom. But China has not yet approved the transaction, Qualcomm has been forced to extend the offer to April 6 after only 19% of NXPI was tendered.
While Mollenkopf expressed confidence at the annual meeting that the deal will get done (and raised the dividend five cents, to 62 cents per share), the European company can survive without a takeover.
The Bottom Line on Qualcomm Stock
Qualcomm thrived in an environment where it held a monopoly on key intellectual property and could enforce those rights in an open market.
But as more countries see technology as key to their national security, those days are over. The battle for 5G will be fought among governments, even more than companies, and if Qualcomm can’t come to a settlement with Apple it will have no governments on its side.
Peace with Apple would bring huge dividends, literally billions of dollars in past-due royalty payments, and the promise of more profits on the next communications platform. That’s what analysts are betting on. But as of now the peace terms will be steep, perhaps steeper than analysts realize.
Qualcomm stock may look like a bargain, but it’s also a gamble on an elusive corporate peace.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
