Speculators got very interested in Qualcomm Inc. (NASDAQ:QCOM) over the Mother’s Day weekend, increasing the QCOM stock price almost 3%, a gain of about $2.4 billion.
The catalyst was a report that China has restarted its review of Qualcomm’s proposed purchase of NXP Semiconductors NV (NASDAQ:NXPI), which rose over 10%, a gain of nearly $450 million, on that news.
Qualcomm had proposed buying the Dutch chipmaker for $44 billion last year. At the time, the deal was seen as a “poison pill” against the Broadcom Inc. (NASDAQ:AVGO) effort to buy out Qualcomm.
The Broadcom deal was stopped on grounds of national security and it was assumed China would retaliate by refusing to approve the NXPI deal. But a sudden thaw in U.S.-China relations over the weekend, including a lifeline to Chinese mobile phone company ZTE, seems to have been reciprocated by a re-start of the review.
That was all it took to excite people about QCOM stock.
NXPI and QCOM Stock
Analysts are mixed on the wisdom of the Qualcomm-NXPI deal, with some calling it Qualcomm’s best bet to get into self-driving cars and others saying it makes Qualcomm a debt slave with $34 billion in borrowings on $43 billion of assets, erasing $35 billion of cash from the books.
NXPI is a former unit of Koninklijke Philips NV (NASDAQ:PHG), the Dutch consumer electronics giant, and bought the former Freescale Semiconductor of Austin, Texas in 2015. Freescale was a communications chip company that had been broken out of Motorola.
NXP’s work on combining fast processing with high-speed communication made it a leader in the race to build self-driving cars. When combined with Qualcomm’s Snapdragon chips and neural processing engine it became the Drive Data platform.
Jacobs Deal Provides Support
A second support for QCOM stock is a proposed $100 billion buyout from former chairman Paul Jacobs. That would be a 20% premium over Qualcomm’s current valuation and result in Qualcomm going private.
Beyond all this, the company is super-cheap right now, having not recovered from the cancellation of the Broadcom takeover. As recently as 2016 Qualcomm had profits of $5.7 billion, which would be a price to earnings ratio of under 16 at its current valuation.
Getting profit peace with Apple Inc. (NASDAQ:AAPL), something I have written about before here, could even become possible after a takeover, which might why big funds may back the takeover.
CEO Steve Mollenkopf’s strategy to demand high royalties from all phone makers, even those who don’t buy Qualcomm chips, has been controversial since his ascension to the CEO chair in 2014.
Also, the company had previously won legal fights for its position in China and Korea before running into Apple, which wanted discounts on the patent rights and has been working with Intel Corporation (NASDAQ:INTC) on alternatives.
Patent peace might cause Apple to go back to Qualcomm, which it’s thought has better products, and combined with resuming royalty payments deliver a windfall to Qualcomm’s new owners.
The Bottom Line on QCOM Stock
I was not bullish on Qualcomm the last time I wrote about them.
I called the Apple battle Mollenkopf’s Vietnam, and I questioned whether the company could retain its cellular monopoly in the age of 5G, which has become a national security question for many countries.
But the prospects of patent peace, a completed deal for NXPI, and the excitement of a new takeover effort from private equity are beginning to look like more than just a lot of chatter. Qualcomm is expected to earn 58 cents per share on $5.2 billion in sales this quarter, even without these other catalysts.
It may be time to throw some mad money Qualcomm’s way.
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.
