Qualcomm (NASDAQ: QCOM) has had a terrible run in the past month. Shares have lost 17% just since the beginning of 2017.
The new year has not been kind to Qualcomm.[ad#Google Adsense 336×280-IA]The stock fell another 5% when the company reported fiscal first-quarter earnings, even though Qualcomm beat expectations on earnings per share.
Investors have rushed for the exits on news of a $1 billion lawsuit by Apple (NASDAQ: AAPL), one of Qualcomm’s biggest customers.
Thanks to the share price decline, Qualcomm shares are cheap, with a nearly 4% dividend yield.
Use the short-term pessimism as a buying opportunity.
Ignore the Noise, Buy Qualcomm Shares
Apple’s lawsuit alleges Qualcomm has charged unfair royalty rates, and that Qualcomm has abused its stranglehold on the global chip industry.
This is a difficult situation for Qualcomm, no doubt. It is a major supplier to Apple, and $1 billion is clearly not a trivial sum.
However, it’s worth noting that these kinds of spats over intellectual property routinely happen in the technology industry. Analysts widely expect the two companies to continue their harmonious relationship.
In Qualcomm’s conference call to discuss its quarterly earnings, CEO Steve Mollenkopf said that there is “no better long-term partner for Apple than Qualcomm.” And, he reassured analysts that Qualcomm fully intends to remain a good supplier for Apple.
It’s in the best interest of both Qualcomm and Apple to end the lawsuit, and maintain their mutually-beneficial relationship.
The lawsuit has taken attention away from Qualcomm’s performance, which has improved over the past several quarters.
Short-Term Volatility, Long-Term Opportunity
In the fiscal 2017 first quarter, Qualcomm grew revenue and adjusted earnings per share by 4% and 23%, respectively.
The technology licensing business was Qualcomm’s best performer last quarter. Revenue rose 13% year over year, thanks largely to 8% growth in 3G and 4G device shipments.
Qualcomm earned $1.19 per share for the quarter, as adjusted for one-time items. This beat expectations, which called for $1.18 per share.
However, revenue slightly missed expectations. Revenue clocked in at $5.99 billion, while analysts expected revenue of $6.12 billion.
Going forward, Qualcomm could see accelerated growth, thanks to new product launches. The company unveiled the 835 Snapdragon processor at this year’s CES trade show. And, Qualcomm is working on chips and processors for 5G rollout.
The next growth wave for Qualcomm will be centered around connectivity. Due to its industry-leading position, Qualcomm should have no trouble entering the Internet of Things, autonomous vehicles and virtual reality.
Qualcomm’s foray into these growth areas will be accelerated by its massive $47 billion takeover of NXP Semiconductor (NASDAQ: NXPI), which has a huge semiconductor portfolio that caters to self-driving vehicles and unmanned drones.
The deal is expected to close in 2017, and should add to Qualcomm’s growth immediately.
Qualcomm Shares at a Bargain
The scary headlines have made for higher-than-usual volatility in the Qualcomm stock price. The pessimism has brought down Qualcomm stock, but investors should not lose sight of the long term.
The Apple lawsuit will be settled with time, and the long-term future of the company remains bright. Qualcomm has returned to growth, as the smartphone boom is nowhere close to running out of steam.
If anything, the elevated headline risk has made Qualcomm shares a bargain. Shares trade for a price to earnings ratio of 14. By comparison, the S&P 500 Index has an average price to earnings ratio of 25.
And, Qualcomm’s share price dip has elevated the dividend yield to 4%. This is double the average dividend yield of the S&P 500.
Qualcomm should continue to return huge amounts of cash to shareholders. The company returned $1.2 billion to investors last quarter alone, through dividends and share repurchases.
Its huge cash returns are thanks to its excellent balance sheet. The company ended last quarter with $29.7 billion of cash, marketable securities, and long-term investments, compared with just $9.9 billion of long-term debt.
As a result, long-term income investors should add Qualcomm to their watch lists.
— Bob Ciura[ad#wyatt-generic]
Source: Wyatt Investment Research