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Qualcomm, Inc. Stock Has Fallen into a Lose-Lose Situation

Will Healy

The adage of “may you live in interesting times” holds true for Qualcomm, Inc. (NASDAQ:QCOM) stock. As it stands now, telling whether Qualcomm is the hunter or the hunted remains difficult. The company continues to work on closing a deal to acquire NXP Semiconductors NV (NASDAQ:NXPI), but that might not be enough for QCOM stock to be a winner.

Conversely, Broadcom Ltd (NASDAQ:AVGO) is also trying to acquire Qualcomm. Both deals face serious challenges. Additionally, through the NXP deal, QCOM is still working to acquire new lines of tech such as self-driving cars that could keep it competitive. Unfortunately, all these scenarios leave little incentive for investors to open positions in Qualcomm stock.

Broadcom Creates Uncertainty for Qualcomm Stock

Qualcomm has spent years in the investment wilderness. The stock stagnated for years with aging technology and a long-standing legal battle with Apple Inc. (NASDAQ:AAPL) regarding royalties on Qualcomm chipsets.

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Acquiring NXP would place Qualcomm in self-driving cars and would answer competitive threats coming from other tech companies such as Nvidia Corporation (NASDAQ:NVDA). The fact that NXPI stock currently trades above Qualcomm’s asking price has complicated that potential merger.

The Broadcom offer adds even further confusion. The interesting part of Broadcom’s attempted takeover is the fact that Broadcom wants Qualcomm regardless of whether the NXP merger occurs. However, it makes sense given that Qualcomm will have $38 billion more on its balance sheet if it does not purchase NXP.

Owners in Qualcomm stock can take some comfort in knowing its present assets contain some value. Still, the problem for the average QCOM investor is determining how the company will derive future gains. Broadcom’s offer for Qualcomm currently stands at $70 per share.

With QCOM stock trading in the $66, this only represents a 6% premium. Our own Luke Lango thinks Broadcom will increase its offer to $75 per share. On average, mergers add a premium of 20-30% over the pre-merger trading price.

Given the $52 per share price on QCOM stock before the announcement, a $70 per share price makes sense. However, even if Broadcom pays $75 per share, that does little to help current buyers.

Issues with NXP Remain

NXPI stock currently trades at about $118 per share. Since Qualcomm’s offer still stands at $110 per share, NXPI shareholders have little incentive to sell. As I stated in an earlier article, QCOM would likely have to raise its bid to complete the merger. Paying a higher price will probably bring down QCOM stock.

Moreover, without NXP, Qualcomm finds itself left with its older technology that has left QCOM stock in stagnation for years. Over the past five years, revenue growth has remained minuscule, and net income in 2017 was at one-third the level of Qualcomm’s earnings per share (EPS) in 2014.

With the stock trading at over 40 times earnings, little incentive exists to pay that premium without new lines of business to drive profits. While analysts forecast some EPS recovery for the next two years, much will hinge on the success or failure of both proposed mergers.

Concluding Thoughts on Qualcomm Stock

Regardless of what happens with both proposed mergers, near-term growth prospects for Qualcomm stock remain uncertain at best. The merger with NXP will not occur with NXPI stock trading higher than Qualcomm’s proposed price.

Moreover, a successful Broadcom takeover at the suggested price leaves only a small return at the current QCOM stock price. Plus, neither merger occurring leaves Qualcomm with the current technology that’s failed to inspire stock investors. Given the possible scenarios, investors have little to gain by taking a position in Qualcomm stock.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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