Get Rid of Qualcomm?
Dear Mr. Berko: In November 2016, my stockbroker had me buy 200 shares of Qualcomm at $71.25 for income and growth. It’s now $51, and my broker wants me to sell the stock and take a $4,050 loss. He said Qualcomm is being sued by Apple, and he thinks it could really hurt the company. Please explain what the suit is about. And would you also advise me to take a loss? — FL, Vancouver, Wash.
Dear FL: Qualcomm (QCOM-$51) and Apple (AAPL-$154) remind me of two kids arguing over who owns the football. In late January, AAPL sued QCOM for $1 billion, claiming that QCOM has been charging royalties for technologies that QCOM never developed and holds no patents for. QCOM disagrees. This suit came on top of a Federal Trade Commission suit against QCOM over unfair patent licensing practices. For the purposes of this answer, the mind-numbing details of the QCOM/AAPL suit are unimportant, and I don’t know which firm will prevail. But several weeks prior to the FTC’s complaint, QCOM was trading in the low $70s. QCOM’s 25 percent price decline suggests that the results of the suit are a foregone conclusion. AAPL has been trying to reduce its dependence on QCOM’s technology for years. However, knowledgeable sources recognize that QCOM’s designs are superior and believe that AAPL will continue to rely heavily on QCOM’s technology. Meanwhile, AAPL recently hired one of QCOM’s top chip engineers with a multimillion-dollar contract. This suit is going to take years to conclude and prompted QCOM to reduce expected earnings by $500 million this year.
Qualcomm is a 31,000-employee, $23 billion-revenue tech company that designs and manufactures digital communications products. The company operates three divisions. Qualcomm CDMA Technologies develops and supplies integrated circuits and software based on code-division multiple access and orthogonal frequency-division multiple access technologies, which are used in voice and data communications, networking, application processing, and GPS products. QCT produced 12 percent of QCOM’s pretax earnings last year. Qualcomm Technology Licensing grants licenses to use portions of its intellectual property portfolio, which contains numerous patents useful in the manufacture of wireless products. This licensing division was responsible for 85 percent of last year’s pretax earnings. Qualcomm Strategic Initiatives invests in early-stage companies in various industries — such as digital media, e-commerce, health care and wearable devices — supporting all voice and data communications. QSI contributed 3 percent to QCOM’s pretax earnings last year.
QCOM’s projected 2017 earnings of $4.25 a share have produced a $2.28 dividend yielding a darn fine 4.36 percent. QCOM’s first dividend, in 2003, was 9 cents a share. Since then, QCOM’s board has increased its dividend every year. Most QCOM-watchers expect 2018 revenues to come in at $24.6 billion, generating share earnings of $4.85 and a dividend increase to $2.46. And investors will agree that $2.46 would be an attractive dividend from a remarkably high-class technology company.
QCOM appears to be a fine growth and income investment. And long-term investors who can look past the next dozen or so months should be nicely rewarded. In the next three to four years, revenues should grow by 20 percent, to $30 billion; net profit margins may improve significantly; earnings could come in at $7 a share; and the dividend could be raised to $3.35. Most of QCOM’s 1.5 billion shares are owned by the likes of BlackRock, Vanguard, State Street, T. Rowe Price, Invesco, Bank of America Merrill Lynch, Fidelity, Northern Trust and the Bank of New York Mellon. And Argus Research, Standpoint Research, Thomson Reuters, Standard & Poor’s Capital IQ, Market Edge, J.P. Morgan, Goldman Sachs and Credit Suisse are bullish, as each of these firms has a “buy” recommendation on QCOM.
Meanwhile, your broker is dumber than a cow, and his selling advice is some nine months and 20 points late. Rather than sell your 200 shares of QCOM, you should be a buyer and use the lower price to reduce your basis to $61. Many of Wall Street’s analysts believe that QCOM will be a $100 stock in three to five years. I agree.