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Time to Buy Qualcomm

- By Harsh Jain

Qualcomm Inc. (QCOM) performed amazingly well in 2016 as the stock was up more than 30% due to the company's bid to acquire NXP Semiconductors (NXPI). The stock, however, is off to a bad start heading into 2017.

The company reported its first-quarter 2017 results in January. For the quarter, the company recorded earnings per share of $1.19, beating the estimates by just one cent. On the other hand, revenue came in at $6 billion, missing the estimates by $120 million.

Despite the miss, revenue surged 4% year over year compared to -18.1% in the first quarter of 2016.

Apple Inc. (AAPL) is partly responsible for Qualcomm's downturn this year, as it sued the company "for charging royalties for technologies they have nothing to do with." Unfortunately, if Qualcomm fails to counter Apple's allegations, it will be forced to lower its licensing fees, which will adversely impact its profit margins. This lawsuit followed one by the U.S. Federal Trade Commission over unfair patent licensing practices.

While these lawsuits could threaten the Qualcomm-NXP deal, they also present a good buying opportunity as the stock is down approximately 11% year to date.

Apart from the licensing business, Qualcomm's chip manufacturing business plays a very significant role in generating a major portion of its overall revenue. Over the past few years, the company's chip manufacturing business has lost market share to cheaper rivals like MediaTek (2454.TW) and Huawei.

Consequently, to overcome these threats, Qualcomm introduced Snapdragon chips for drones, Internet of Things (IoT), connected cars and various other products. In additon, the company recognizes the significant growth opportunities in the autonomous car market. Acquiring NXP Semiconductors could help it become the largest automotive chip manufacturer worldwide. As such, it is not likely Qualcomm will let the deal slip through its fingers easily.

In additon, due to its partnership with Samsung Electronics (005930.KS), Qualcomm's Snapdragon 835 processor chip is expected to be first released in the Galaxy S8 smartphone later this month, providing further upside.

Summing up

Qualcomm rewarded shareholders with healthy returns in 2016 and offers a strong dividend yield of 3.63%. Moreover, the stock has already started displaying upward momentum after falling 18% in January. The stock is still down almost 11% year to date and currently trades at a price-earnings (P/E) ratio of almost 18, down noticeably from industry's average of 22. As a result, it looks like the right time for investors to add Qualcomm to their portfolios.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.