David Rolfe Comments on Qualcomm
- By Holly LaFon
To say the least, 2018 was an eventful year for Qualcomm (NASDAQ:QCOM). Setting aside the actual financial results of the business, 2018 saw the bid from Broadcom to acquire Qualcomm shut down by a U.S. presidential order in the interests of national security, the bid by Qualcomm to acquire NXP Semiconductor collapse due to the Chinese government's refusal to review the bid for antitrust concerns, the Chinese government coming back months later - after the NXP deal had collapsed and Qualcomm had spent a significant amount of the cash that had been intended to acquire NXP originally on a big share buyback - and saying they now would approve the deal. Additionally, 2018 saw ongoing litigation with Apple, including several rounds of peripheral legal and political skirmishes, some of which have been almost farcical. Perhaps the most ridiculous moments in the legal struggle so far have been both Qualcomm and the Federal Trade Commission wanting to settle an antitrust case which the FTC brought under prior leadership but no longer wants to pursue, but the judge assigned to the case refusing to let them settle and insisting that they battle it out in her court, anyway; or, after Qualcomm failed to get anyone in the U.S. to uphold their intellectual property rights - even after the U.S.'s International Trade Commission found that Apple was infringing upon Qualcomm's patents - Qualcomm finally had to resort to China, not generally known as a bastion of intellectual property protection, to finally get someone to take an actual concrete step to protect their intellectual property rights.
Warning! GuruFocus has detected 6 Warning Signs with QCOM. Click here to check it out.
The intrinsic value of QCOM
Performance-wise, the stock was all over the place, as you would expect, considering that so many extenuating factors were involved. Occasionally, it was one of our best performers, and occasionally, as in the fourth quarter, it was one of our worst, but the stock ended the year in the middle of the pack for us.
Turning to our outlook for Qualcomm, as always, we continue to evaluate the fundamental qualities of the business and attempt to determine the fair value of the stock. With the Company deploying a significant amount of its cash balance to accretive share repurchases, we do not see another large proposed acquisition on the horizon. Likewise, although the Company does own extraordinary valuable IP, which may make it interesting to other potential acquirers - just as it was interesting to Broadcom - we do not factor another potential bid into our analysis. On the Apple front, we do expect a settlement at some point; admittedly, we are fairly shocked that this legal and political sitcom has gone on as long as it has. While we could argue endlessly about what this settlement will look like, and while we definitely are not lawyers, we are fairly confident that Apple will not be able to use the Company's technology for free into perpetuity. With Qualcomm's current earnings and estimates, including nothing from the Apple relationship, we view any potential settlement as pure upside to future fundamental numbers.
Looking at business fundamentals, recent earnings warnings from Apple and Samsung Electronics indicate weakness in smartphone unit growth, although higher-priced phones still allow some opportunity for growth in Qualcomm's licensing business, which is generally paid as a percentage of a phone's manufacturing costs. Importantly, Qualcomm has enjoyed significant growth outside of smartphones; for example, their auto-related backlog nearly doubled in their 2018 fiscal year, and we expect revenues in "adjacent," or non-mobile-device applications, to represent perhaps +30-40% of revenues in Qualcomm's Technology division in the current fiscal year. We also expect the next generation of wireless connectivity, or "5G," to be a catalyst for growth in coming years, with both consumer and commercial applications expected to drive demand. As in other generations of wireless, Qualcomm provides critical technology in the foundations of 5G. The first consumer 5G networks are expected to launch this year, with contributions from 5G reaching more meaningful levels in 2020. Beyond this, we will see significant value delivered by $1 billion in cost savings, continuing share repurchases, and eventual Apple settlement.
In conclusion, we believe that a return to evaluating the fundamental value of the business-- something that will be easier for the market to do once the Apple situation is resolved one way or another, especially--will result in a win for shareholders. Even before we see meaningful growth from the next round of mobile innovation in 5G, or any payment of any kind from Apple, the stock is trading at a very depressed valuation, and we see plenty of upside in estimates and the stock price as developments play out over the next 12-24 months.
From David Rolfe (Trades, Portfolio)'s fourth-quarter 2018 Wedgewood Partners investor letter.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 6 Warning Signs with QCOM. Click here to check it out.
The intrinsic value of QCOM
