QUALCOMM, Inc: Use The Recent Weakness In QCOM Stock To Get Long

Ignore the negative sentiment around Qualcomm. Use any pullbacks in QCOM stock to go long.

  • Although recent news out of South Korea doesn't look encouraging, I believe a deal will be reached similar to what happened in China.
  • The company's new Snapdragon 835 is set to go up against Intel in the PC space.
  • The NXP acquisition will bring meaningful synergies especially concerning the customer list NXP has at its disposal.

Qualcomm's (NASDAQ:QCOM) brand new smartphone chip “Snapdragon 835” illustrated to me that this company will remain strong for the long haul. Recent negative commentary regarding the South Korean $850M antitrust fine has raised doubts about the future earnings growth of Qualcomm and its potential negative impact on QCOM stock. The latest fine has come on the back of a similar fine in China ($975 million) where governing bodies are stating that Qualcomm is refusing to license parts of its technology to selective manufacturers. Qualcomm has decided to appeal as it knows its lucrative licensing business may be at risk here as a negative ruling in South Korea may open up a path for other countries to follow. Revenues which Qualcomm receives off its patents came in at around 34% of the total take last year, so this area definitely is the breadwinner for the company and a key driver of the Qualcomm stock price.

However, the Chinese ruling, in the end, didn’t look as bad as many envisaged at the outset. For example, the lion's share of Chinese device makers continue to make royalty payments to Qualcomm though at slightly reduced rates. Therefore, I believe the same situation will probably transpire in South Korea. Remember long-term investors here are just looking for stability on this side of the business. Why? Because Qualcomm is transitioning aggressively which over time will be a positive for the company since the company would be having a larger number of diversified products at its disposal. Here are 3 areas I will be watching with interest in the months to come.

Also Read: Will QUALCOMM, Inc. (QCOM) Stock Soar To New Highs In 2017?

Qualcomm's Licensing Income Will Remain A Cash Cow

The first area that QCOM stock investors would be looking at closely is the company's new smartphone chip "Snapdragon 835". The disruptive nature of this piece of technology is that it is also being targeted for the PC market. Apart from the PC market, many analysts are bearish on Qualcomm's growth potential due to a perceived slowdown in the smartphone market. I don't buy this line of reasoning one bit, at least over the long term. In fact, the main reason we saw a slowdown in smartphone sales in 2016 was because there were no significant improvements in technology to drive the growth. However, improvements such as these which will result in thinner handsets, lower cost and much longer lasting batteries will drive the next wave of growth over time. Furthermore, as the industry migrates to 4G and later to 5G, I would be confident that Qualcomm will continue to collect royalty checks which will buy the company time to grow its business in other areas.

Qualcomm Ready To Take Intel Head On With Its New Range Of Snapdragon Chips

The disruption in the PC market is what investors will be focusing on. PC sales are definitely slowing with the exception of high powered units usually used by gaming enthusiasts. Bulls will be hoping it will only be a matter of time before future versions of the Snapdragon 835 chip can compete with Intel in this market. This is the diversification I was alluding to earlier. Qualcomm has always been a pioneer in wireless & mobile technologies. PC's, in general, are about to become far lighter but yet far more powerful. Qualcomm appears to have its objectives set on competing head on with Intel. It is a big deal that Microsoft (NASDAQ:MSFT) has already announced that windows 10 will support Qualcomm's next generation processors. Growth here could be just getting started with a long term positive impact on Qualcomm stock.

Also Read: Are Qualcomm Inc (QCOM) Dividends Safe Post The NXP Buyout?

The Qualcomm-NXP Partnership Looks Very Encouraging For IoT & The Automotive Areas

Furthermore, the NXP Semiconductor (NASDAQ:NXPI) acquisition should enable Qualcomm to really become a frontrunner in the lucrative automotive area. There have been rumors that the deal could hit some roadblocks but I see the acquisition eventually going through sometime this year. Qualcomm will want to push its processor business into the automotive market and NXP with its extensive number of loyal distributors and customers should be able to help here in a big way. Billions are being plowed into the autonomous vehicle market at present and first mover advantage is going to be critical. One would feel that the combined technologies of the Qualcomm/NXP partnership should gain ground here as the IoT phenomenon continues to gain traction. Qualcomm already has a presence here with its Snapdragon processors in some Android Auto IVI systems. For a start, if NXP's RFCMOS chips (which do away with multi-chip systems) can meaningfully add value to Qualcomm's current offering in this space, the new partnership could leapfrog a number of competitors in a short span of time,  which will be one more positive for QCOM stock.

Summary

Qualcomm is pivoting away from its mobile chip business and branching out into areas where high growth rates are expected. QCOM stock currently has an earnings multiple of 16.86 which is well below its 10 year average of 20.8. A lot of bearish press has been written about the company recently with respect to its licensing arrangements. This too shall pass. Analysts have long-term earnings growth projections of close to 10% for Qualcomm Inc. I would use any pullbacks here to go long.

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Jack Foley Jack Foley   on Amigobulls :
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