Shares of semiconductor giant Qualcomm Inc. (NASDAQ:QCOM) are little-changed this year, making QCOM stock a laggard compared to the widely followed PHLX SOX Semiconductor Sector Index, which is up about 20% this year.
QCOM stock is the fifth-largest holding in that index, and the stock is starting to show some signs of life. This month, Qualcomm stock has risen by 9%, thanks in part to some favorable legal news regarding the company’s contentious, long-running litigation against Apple Inc. (NASDAQ:AAPL).
On Mar. 15, San Diego-based Qualcomm “announced that a jury in the U.S. District Court for the Southern District of California found that “Apple’s iPhone 7, 7 Plus, 8, 8 Plus and X infringe two Qualcomm patents,” according to a statement issued by QCOM. “The jury awarded Qualcomm $31 million in damages for infringement of the patents from July 6, 2017, the date the lawsuit was filed, through the end of the trial. The three infringed patents cover technologies invented by Qualcomm in San Diego,” the company reported.
In another important, though less publicized, ruling, Qualcomm scored a legal win in Japan after the Japan Fair Trade Commission (JFTC) ruled that QCOM is not a monopoly.
“Following a nine-year evidentiary proceeding, the JFTC concluded that Qualcomm’s cross-licensing provisions and non-assertion covenants that were the subject of the cease-and-desist order did not violate Japanese antimonopoly law,” the commission said in a statement.
Beyond the Courtroom
Clearly, legal issues have been hanging over QCOM stock. It is also clear that the shares are responding well to the parting of some of those clouds, but there is more to the Qualcomm stock story than legal matters.
As indicated by its relationship with Apple, QCOM is a major supplier of chips to the smartphone market. Last year, the growth of the smartphone market slipped a bit, but the sector is expected to bounce back this year.
“Continued developments from emerging markets, mixed with potential around 5G and new product form factors, will bring the smartphone market back to positive growth,” research firm IDC said in a statement. “IDC expects year-over-year shipment growth of 2.6% in 2019. Over the long-term, smartphone shipments are forecast to reach 1.57 billion units in 2022.”
Meanwhile, QCOM has significant exposure to the 5G phenomenon. While 5G is garnering plenty of press this year, its rollout is not expected to commence in earnest until 2020, and it appears Qualcomm will be ready.
Investors in QCOM stock could benefit from the proliferation of 5G. By some accounts, to solidify its 5G offerings, AAPL will need to bury the hatchet with Qualcomm.
Qualcomm’s recently revealed Snapdragon X55 5G modem gives the company a leg up in the 5G market, one that extends beyond smartphones.
“Qualcomm claims that the X55’s flexibility should make it a better fit for a much broader range of devices,” according to The Verge, a technology news website. “While the X50 (the device the X55 is replacing) is tailored towards smartphones and Wi-Fi hotspots, Qualcomm has spent more time tailoring the architecture of the X55 towards a wider range of devices ranging from always-connected PCs to cars.”
Qualcomm’s Cash
In an effort to acquire rival NXP Semiconductors (NASDAQ:NXPI), Qualcomm amassed $40 billion in cash, but when that deal was scuttled last year, QCOM pledged to use $30 billion to repurchase shares of QCOM stock, meaning the company still has about $10.3 billion in cash on hand.
Not only is Qualcomm’s share-buyback program serving the goal of reducing the amount of Qualcomm stock outstanding, but with the number of shares outstanding falling to 1.22 billion in the current quarter from 1.41 billion in Q4, Qualcomm’s dividend expenses are declining as well.
QCOM stock has a forward dividend yield of about 4.38%, which is higher than rival semiconductor makers of comparable size. QCOM has increased its dividend in recent years, but that growth could end if the company’s free cash flow does not increase.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
