Yahoo Finance Why Qualcomm, Inc. (QCOM) Stock Is Heading to $70
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Deciding what course to take with tech stocks hasn’t been an easy one lately, giving the rash of downgrades and bearish commentary coming from some prominent Wall Street analysts. Still, it’s tough to ignore the potential value in semiconductor Qualcomm, Inc. (NASDAQ:QCOM). And that’s not just because of the big 4% dividend in QCOM stock.
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Even after the analysts comments sparked a selloff in the Nasdaq Composite, QCOM stock remains a relative bargain compared to the high-flying chip stocks like Nvidia Corporation (NASDAQ:NVDA) and Broadcom Ltd (NASDAQ:AVGO), which have posted respective year-to-date stock gains of 47% and 38%.
From my vantage point, Qualcomm — down almost 13% year to date — presents a buying opportunity. QCOM stock, which could reach $70 in the next 12 to 18 months — delivering 23% returns — should be owned by investors who are willing to look beyond the noise. That includes the company’s royalty dispute with Apple Inc. (NASDAQ:AAPL).
Reasons to Like Qualcomm
QCOM shares have been under pressure after the company announced in April that the iPhone maker would withhold payments to its contract manufacturers for the royalties owed by those manufacturers. A dispute between partners, alone, shouldn’t dissolve what remains a good business model for Qualcomm — one that has and can still deliver growth and profits well into the future.
Qualcomm’s massive patent portfolio, the bulk of which are in fast-growing industries such as mobile and 3G, 4G and next-generation wireless technologies, not only allows QCOM to control prices and collect fees, it also insulates the company from potential competitive threats. What’s more, the company is still an important supplier to the world’s smartphones manufacturers such as Apple and Samsung Electronic (OTCMKTS:SSNLF).
How important is that business model? Consider, almost every smartphone and wireless device manufactured around the world has to pay QCOM to be a player in the mobile.
In Qualcomm’s first quarter, it shipped 331 million to 335 million 3G/4G handsets, which grew 8% year over year. Its average selling price for those handsets — with in-built Qualcomm chipset — was between $186 to $192, coming in higher than analysts expected. It’s likely for this reason, including the fact that the QCOM stock is down, that Wall Street has become more optimistic.
Wall Street Is Starting to Come Around
Last Thursday, Susquehanna Financial Group analyst Christopher Rolland reiterated his positive rating on Qualcomm and raised his price target to $67 from $61. Rolland cited, among other things, QCOM’s new joint venture in China, which the analyst believes could help mitigate long-term competitive threats in the country.
The joint venture — called JLQ Technology — teams Qualcomm with JAC Capital, Wise Road Capital and Datang Telecom subsidiary Leadcore Technology.
The four JV partners will focus on the design, packaging, testing, customer support and sales related to chip sets for mass-market smartphones designed and sold into China.
It remains to be seen if Rolland’s prediction comes to pass, but even if the response is muted, QCOM stock — trading at less than 12 times cash-adjusted earnings — should outperform, given the low expectations implied in its growth prospects.
And to say nothing about the Qualcomm’s pending $47-billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI). This deal should give QCOM an expanded footprint in high-growth areas such as Internet of Things, automotive, security and networking.
These factors, along with the the company’s recent strong earnings results should put Qualcomm stock on the radar of value hunters who are looking for a potential turnaround candidate.
Bottom Line for QCOM Stock
From a risk-versus-reward perspective, QCOM looks like a no-brainer. Its earnings forward multiple of 13 suggests barely zero growth. Plus, when adjusting out its cash, that multiple is closer to single digits.
Not only does the company have a strong balance sheet to lean on, which includes some $10 billion in cash and another $6 billion on operating cash flow, it also pays a robust dividend yield of 4%, which is twice the S&P 500 index.
As such, I expect QCOM stock to head north towards $70 per share some time in 2018.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
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