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Believe in This Economy? Buy Qualcomm, Inc. (QCOM) Stock

If you believe in the near-term health of the U.S. economy the best thing you can do for your portfolio today is buy stock in Qualcomm, Inc. (NASDAQ:QCOM).

Believe in This Economy? Buy Qualcomm, Inc. (QCOM) Stock
Believe in This Economy? Buy Qualcomm, Inc. (QCOM) Stock

Source: Shutterstock

For most of 2017 Qualcomm shares and results have been battered by an ongoing dispute with Apple Inc. (NASDAQ:AAPL) over royalties on its intellectual property. Apple demands a cut and Qualcomm, so far, has been unwilling to grant them.

Apple has begun using Intel Corporation (NASDAQ:INTC) modem chips in some iPhones, and Qualcomm has responded by asking the International Trade Commission to prevent imports of Apple products containing those chips.

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Qualcomm’s June quarter earnings showed the impact. Revenue of $5.4 billion, down from $6.04 billion a year ago. Net income under Generally Accepted Accounting Principles (GAAP) of $866 million, 58 cents per share (83 cents non-GAAP) instead of the $1.4 billion, 97 cents per share, of last year.

QCOM stock is down roughly 20% so far in 2017. Yet many analysts, including our James Brumley and Richard Saintvilus, remain high on QCOM stock, and for good reason.

Why Pound the Table?

For one thing, Qualcomm remains highly innovative, witness its latest depth-sensing camera. It can be used for identification, sports an infrared mode that lets it work in the dark and requires less current than Intel’s RealSense.

Bulls are also betting that the war with Apple won’t go on much longer. Qualcomm’s moving the case to the International Trade Commission could yield a quick settlement . The two companies need one another, Qualcomm for its 5G technology and Apple for diversity of supply.

Currently, Qualcomm charges manufacturers a percentage of products’ retail prices for using patents that are essential to industry standards, as Brumley notes, meaning Apple winds up paying Qualcomm more than other phone makers even when it uses Intel chips. When Qualcomm chips are used, some of these payments are rebated, and Apple is withholding its rebates pending a settlement.

A Coiled Spring

Credit Suisse analysts think a settlement will bring a fat check to Qualcomm, and thus Qualcomm stock is a coiled spring, ready to explode when that settlement is announced.

Once the legal fight is ended, Qualcomm may also be able to quickly complete its acquisition of NXP Semiconductors NV (NASDAQ:NXPI), for which it agreed to pay $47 billion last year including debt. NXP is key to Qualcomm’s Internet of Things play, moving it beyond phones into integrated systems.

The longer the case drags on, the greater the risk that Apple will find a way to eliminate Qualcomm from its supply chain and that hedge funds, which have piled into NXP, may force management to raise the price on the deal. Bears are also looking to the structure of any royalty deal for signs it is cutting into future revenues.

The Bottom Line

The dispute with Apple has pushed Qualcomm stock to low levels for a company with its property and growth prospects. There remain analysts, like our own Bret Kenwell, who continue to see Qualcomm as a no-go zone. 

Bret’s right in that QCOM stock is under real pressure right now. Qualcomm CEO Steve Mollenkopf keeps hinting at a settlement, meaning he recognizes his company is being hurt.

But if you wait for the settlement before pulling the trigger, you’re going to miss the run-up that will accompany it. The ITC case seems designed to accelerate that settlement, meaning the time is now to get in if you assume the U.S. economy will continue growing over the next year, before the opportunity is lost.

In short Qualcomm will come back, and QCOM stock not getting any cheaper.

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 article.

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