In February 2017 I initiated a position on Qualcomm (NASDAQ: QCOM)– a few days after it was sued by Apple– when stock price plunged 12%– for receiving unreasonable royalty fees via leveraging on their monopoly in the chip making industry.
Apple sued Qualcomm and I bought it. Why?
As of 20 February 2017, the current stock price for Qualcomm is about 56.46 USD. It’s 52 weeks high stock price is 71.62 USD and it’s 52 weeks low stock price at 48.76 USD.
I purchased it at 55 USD– and later on, I averaged down to a current average cost for Qualcomm at 53.64 USD.
When I see bad news, I try to assess further to see if it is something I understand and whether there are good opportunities hidden behind it. Of course, a fearful situation is always good for the value investors because that might be the time to get greedy.
Of course, a fearful situation is always good for the value investors because that might be the time to get greedy.
Qualcomm revenue comes from its ability to get a royalty from companies using their chips. This is a licensing business model.
Their earnings for their semiconductor and licensing business has increased year on year based on the latest quarterly earnings result released in January 2017.
As it earns mainly from licensing its intellectual property such as using its chips in iPhones (Apple has been using Qualcomm’s chips for all their iPhones except for iPhone 7), the main risks here is when companies such as Apple or Samsung begins to internally develop their own chips.
Based on history, it is able to charge a royalty fee as high as 3% to 5% of the price of each device sold.That is a high amount of fee they are collecting.
Of course, there are a lot of uncertainty in this investment due to the pending lawsuit by Apple.
This is what Mr Steve Mollenkopf, CEO of Qualcomm Incorporated is saying about the lawsuit, “the recent legal and governmental actions against Qualcomm are at their core driven by commercial disputes. As we have done in the past, we will vigorously defend our business model and the value of a portfolio of technologies that has been so instrumental to the success of the mobile communications industry.”
I assure you that I have no confidence on whether Apple will successfully sue Qualcomm or not. But history has proven that it will not be an easy thing to successfully sue Qualcomm as it can be seen in the Nokia case.
But QCOM solid balance sheet and above industry average dividend yield of 4% (and has been increasing every year for the past 10 years) is a positive aspect that serves as a good margin of safety for me.
In fact, on January 12, 2017, they announced a cash dividend of 0.53 USD per share payable on 22 March 2017.
Furthermore, they have a good history of stock buyback via its stock repurchase program. That is with the announcement on March 9, 2015, that the management has been authorised to repurchase up to $15 billion of their common stock.
Recently, they also announced that they want to acquire NXP Semiconductors– a key player in the autonomous cars industry– which serves as a good diversification to their current business model (mainly in the licensing business for smartphones).
Based on their recent quarter earnings report on January 2017, this is what they say about the NXP deal:
On October 27,2016, we announced a definitive agreement to acquire NXP Semiconductors N.V. for estimated total cash to be paid to shareholders of $38 billion. NXP is a leader in high-performance, mixed-signal semiconductor electronics in automotive, broad-based microcontrollers, secure identification, network processing and RF power products. The transaction is expected to close by the end of calendar 2017 and is subject to receipt of regulatory approvals in various jurisdictions and other closing conditions. We intend to fund the transaction with cash held by foreign entities, which will result in the use of a substantial portion of our cash, cash equivalents and marketable securities, and new debt.
Why do they do this?
I feel that it will allow them to diversify their source of revenue by giving them the opportunity to use its expertise in chip design and connectivity in the automotive and Internet of Things area. If the NXP acquisition succeeds, QCOM addressable market will increase to about 138 Billion USD by 2020. QCOM could also potentially become the largest supplier of chips used in cars.
In the long term, I believe that technologies like the internet of things will be adopted even more with the adoption of 5G– and has huge revenue potential for parties involved in it.
Disclosure: I am long on QCOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: The information provided is for general information purposes only and is not intended to be a personalised investment or financial advice.
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CHRIS LEE SUSANTO
Hi, my name is Chris and I am the founder of Re-ThinkWealth. A blog that focuses on personal finance self-improvement, investments, and investor psychology.
Since early 2015, I manage money for my family and invests it in Singapore and United States equities and options achieving above market return.
I use Value Investing and Options Selling strategies used by Warren Buffett (World’s richest investor) coupled with the core theory of inversion. Inversion meaning that in every investing idea, we have to scrutinise on why it would fail.
This will result in us being more conservative, and being conservative is the key to protecting and growing wealth in the long run.
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