Qualcomm (NASDAQ:QCOM) spent $1.15 billion to buy out the remainder of its partnership with Japan-based TDK Corporation (OTCMKTS:TTDKY). This takeover probably will not offer an immediate benefit to QCOM stock.
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The alliance, valued at a total of $3.1 billion, produced RF front-end filters for 4G or 5G RFFE. Moreover, the company faces three significant threats that likely hold down the value of QCOM. However, this partnership involves one of the three factors that can help to negate these threats, and could even make Qualcomm stock a buy amid intense uncertainty.
The Three Threats
Continuing lawsuits with Apple (NASDAQ:AAPL) has weighed on QCOM stock for years. Just when the company settled with Apple, new legal scrutiny has come as the San Diego-based chipmaker faces a judgment in its lawsuit with the Federal Trade Commission.
For now, Qualcomm has won a partial stay on enforcing the ruling. However, if QCOM were to lose, they would likely have to renegotiate contracts on chipsets, possibly cutting into their profits.
Secondly, China. The People’s Republic accounted for around two-thirds of revenue for Qualcomm in 2018. The U.S.-China trade war certainly presents issues. To have so much of one’s revenue dependent on geopolitical events beyond its control could significantly hurt revenues.
It could also lead to a potential competitor emerging if the dispute ultimately reduces or completely cuts off access in a worst-case scenario.
Third, though this attracts surprisingly infrequent mention, the chart on QCOM stock looks ugly. It has traded in a range that has kept it between $45 per share and $90 per share for almost nine years. At the current $78 per share, it trades toward the high end of the range. Also, it has not yet surpassed the $100 per share top it saw in January 2000.
Three Reasons to Ignore the Threats
To be sure, investors need to consider both the lawsuits and the trading history when considering a position in QCOM. That said, investors should also consider the positives. As discouraging as the problems appear, the reasons to overlook the issues with QCOM may look even more compelling.
First, the company’s multiple relative to growth. In a recent article, I said QCOM stock had a “low multiple relative to predicted 5G growth.”
Qualcomm has a forward price-to-earnings (PE) ratio of 18.5. Despite supporting a multiple below S&P 500 averages, the profit picture looks set to improve dramatically. Though profits will fall by 6% this year, a forecasted growth rate of 21.3% in 2020 should mark the beginning of an expected profit boom.
Secondly, the company pays a stable, battle-tested dividend. The payout of $2.48 per share yields almost 3.2% at current prices. It has also increased every year since 2011. The increases also came every year despite the long-standing dispute with Apple that kept QCOM stock depressed.
The third, and probably most compelling reason involves 5G, which probably ended the legal dispute with Apple. It also probably explains why QCOM bought out the remainder of the TDK partnership.
As our own Faisal Humayan first pointed out, industry analysts predict the chipset market that will hit $2.1 billion in 2020 will grow to $23 billion by 2026. That level of growth should break the $90 per share and $100 per share price ceilings on QCOM stock. It could also make up for any doubts about lawsuits or China.
The Case for QCOM stock
Thanks to 5G, the positives outweigh the negatives on QCOM. To be sure, the antitrust inquiry and China trade both pose threats to Qualcomm. These factors remain mainly outside of the company’s control. The history of the stock also implies price ceilings at both the $90- and $100-per-share levels.
However, thanks to the potential ten-plus fold growth in 5G chipsets, QCOM stock should move higher even if the antitrust suit or China trade policy does not go in their favor.
Moreover, QCOM trades at a low valuation relative to profit growth. Once the company begins to sell 5G chipsets in earnest, Qualcomm stock should finally start to create new all-time highs again. Furthermore, the company has proven it can maintain dividend increases even when outside forces create tremendous pressure.
When considering both the positives and negatives, QCOM stock remains a buy.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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