It’s been a drama-filled year for Qualcomm (NASDAQ:QCOM) and QCOM stock. Besides having to deal with a massive legal conflict with Apple (NASDAQ:AAPL), the company also had to fend off a hostile takeover attempt from Broadcom (NASDAQ:AVGO), and its merger with NXP Semiconductors (NASDAQ:NXPI) failed.
But from April to September, Qualcomm stock did have a nice rally, surging from $51 to $75. However, the upturn would prove fleeting, as QCOM stock now trades below $58.
So could this be a good entry point? Or should investors hold off on QCOM stock? Well, I think the downside of QCOM stock is probably limited at current levels. But unfortunately, QCOM could remain stagnant for a while.
The outcome of the company’s litigation is still blurry. True, QCOM recently got some good news regarding its patent fight against APPL. A court in China ruled in Qualcomm’s favor, granting it an injunction that prevents Apple from importing and selling older iPhone models.
That’s a big win for QCOM stock, right? Actually, it may not be. The court based its ruling on software patents. Keep in mind that these are relatively easy for Apple to circumvent, as Apple’s engineers can come up with workarounds that enable AAPL to avoid infringing on QCOM’s patents. It looks like Apple’s new operating system, iOS 12, already utilizes such workarounds.
Apple v. Qualcomm
In the meantime, AAPL is still aggressively pursuing its lawsuit against QCOM regarding alleged unfair licensing practices. AAPL has also encouraged its suppliers to withhold royalty payments from QCOM by saying it will pay any resulting fines. That is why QCOM’s financial results have meaningfully deteriorated during the past couple of years.
Since AAPL is under a great deal of pressure, its strategy should not be surprising. As the iPhone franchise matures, AAPL is having more difficulty finding growth opportunities. By reducing its licensing fees, Apple can lower its costs, thereby boosting its margins.
So what will be the ultimate result of this legal fight? Most likely, there will be a settlement., since court battles can be dicey. But the settlement talks could be protracted. And more importantly for QCOM stock, the settlement could lower QCOM’s licensing fees over the long-term. That’s probably why QCOM stock has had a tough time getting much traction.
But the battle with AAPL is not the only legal issue that QCOM is facing. QCOM is also dealing with several cases regarding its alleged anticompetitive practices.
One such pending case in the U.S. is being handled by the Federal Trade Commission. In a negative development for QCOM stock, a federal court recently indicated that the FTC’s case is valid and that QCOM may be required to license its technology to competitors.
If Qualcomm loses any of these cases, QCOM stock could take a meaningful hit, since licensing is a core part of Qualcomm’s business model.
The Bottom Line on QCOM Stock
QCOM stock does have some advantages, though. Trading at a forward price-earnings multiple of 12.8, based on the 2019 consensus earnings per share estimate, the valuation of QCOM stock is pretty low. Moreover, the dividend yield of QCOM is 4.3%.
The company should also benefit from the huge upcoming proliferation of 5G. It appears that QCOM has a nice lead in that space, as its new systems have beaten out those of rivals like Intel (NASDAQ:INTC).
But there’s a hitch: 5G won’t gain traction for some time.
And besides, as we’ve seen previously, tech stocks can remain at value levels for many years. So there’s really no need to buy Qaulcomm stock anytime soon.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.