How Qualcomm Became the Sad Guy in a Country Song
“My truck broke down and my dog just died,
My wife ran away, with some other guy.”
-Just Another Country Song, by Ty Christian Wilson
Poor Qualcomm. Years of ongoing turmoil made Qualcomm (QCOM) the poster child for a feature role in The Book of Job or a country song lamenting the loss of all good things in life.
In 2017, Broadcom (AVGO) announced plans to acquire Qualcomm. Qualcomm stock quickly rose 30%, only to lose all those gains in early 2018 when the U.S. government failed to approve the merger.
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Meanwhile, Qualcomm had been working toward a purchase of NXP Semiconductors NV (NXPI) since October 2017. Eight global governments supported the transaction. Then, in 2018, Chinese regulators failed to approve the merger, and the deal fell apart. Rubbing salt in the wound, Qualcomm was required to pay a $2 billion break-up fee to NXP.
Last month, global stock markets exulted in news that Apple Inc. (AAPL) and Qualcomm resolved a long-standing dispute on Federal courthouse steps, as litigation was about to commence.
The two companies had been at each other’s throats for years, with lawsuits pending all over the globe. Apple had accused Qualcomm of illegal practices that gave Qualcomm a monopoly on modem chips. In turn, Qualcomm asserted that Apple was using its technology without properly paying for the patents.
In an abrupt turnaround, Apple agreed to use Qualcomm’s modem chips for iPhones and to also pay Qualcomm an undisclosed amount of money.
As a result, Qualcomm stock rose 56%, from 57 to 89, in just over two weeks. Wow!
AAPL shares, however, have actually backtracked since the deal was announced, indicating that the market viewed Apple’s cash payment to Qualcomm as inconsequential in light of the benefit Apple would receive from recommencing the use of Qualcomm’s products.
Intel (INTC) is a third player in this scenario. Apple had been using Intel as its iPhone modem chip supplier. However, Qualcomm was shipping 5G chips, while Intel’s 5G chips won’t be ready for market until 2020. It therefore makes sense that Apple moved to the chip supplier that was better able to provide the most up-to-date technology, helping Apple compete with Samsung Electronics and other peers.
Intel has announced that it will exit the modem chip business, which was apparently a very small part of their product mix.
In reaction to the Apple-Qualcomm agreement, INTC rose about 5% in the ensuing days, though it has since fallen back amid the recent market retreat.
Is It Too Late to Buy Qualcomm Stock?
Prior to the legal settlement, Qualcomm was projected to see earnings per share (EPS) grow 4.1% and 13.3% in 2019 and 2020, which essentially represents slow earnings growth that moves toward attractive earnings growth. But the new agreement with Apple will dramatically boost the EPS situation, and that’s why the stock rose more than 20 points in 24 hours.
One major Wall Street analyst estimated that Qualcomm’s annual EPS will increase by $2.00 as a result of the Apple agreement. That’s a huge increase, but also vague. Will the $2.00 boost apply to 2019 profits? Will the $2.00 result from the cash settlement, or from organic profit growth from 5G chip shipments, or will the earnings increase be derived from past or future royalties that Apple might pay? No matter how the earnings increase is delivered, $2.00 per share represents a better than 50% increase from prior 2019 consensus EPS projections, and that’s great news.
Another great feature of QCOM stock is the large dividend yield. Even at a share price of 86, the dividend yield is 2.9%.
The key fundamental downside to Qualcomm stock was the long-term debt-to-capitalization ratio, which stood at 77%. I don’t like to touch stocks that have a debt ratio any higher than 45%, so QCOM was certainly not on my buy list. Again, the legal settlement changes everything. Qualcomm could use the undisclosed cash payment from Apple to pay down debt, and continue paying off debt with future income resulting from the Apple business.
QCOM has already shattered its previous all-time high near 74 from September 2018. You could wait for the stock to pull back a bit more, but with a prognosis of very strong multi-year earnings growth, a comparably low price/earnings ratio, and an attractive dividend yield, I believe growth stock investors and growth & income investors should seriously consider owning QCOM.
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