The year 2015 might not have been a good one for Qualcomm Incorporated (O:QCOM), especially the second half. It was also the fact that the company has had to face an endless string of unfavorable news in the recent months. That is one of the reasons for the stock to drop down by one-third in the current year and most of them came in the last six-month period. However, it was not just the company but other semiconductor firms too that have had a rough weather in the current year. For some analysts or investors’, that itself turned into a catalyst to expect some solid returns next year. The stock could bounce back sooner than expected, and the current conditions may offer some good investment opportunities. Let’s look at some of the factors that would contribute to its upside potentials.
Expand The Chip Business
There are some reasons for QUALCOMM, Inc. (NASDAQ:QCOM) shares to take a beating from the investors. One among them was the loss of key design win of iPhone though there might be some doubts about the overwhelming success. The chipmaker is also encountering some issues of Chinese smartphone OEMs paying up royalties. In South Korea, the company is caught with another antitrust probe in respect of its licensing practices. These unfavorable events have taken a heavy toll on the investors’ sentiments. That resulted in the stock trading at a four-year low forgetting that the company is also engaged in expanding beyond the chip business.
There is no doubt that QUALCOMM, Inc. (NASDAQ:QCOM) has witnessed slower sales growth of chips for smartphone. However, its expansion in the area of the Internet of Things (IoT) such as the connected cars, different home appliances, and wearable devices would add value to its top line. For instance, the company’s IoT has already delivered approximately $1 billion revenue on an annualized basis. The key factor is that its chips were used in about 120 million smart-home devices that were shipped in the last year. That suggested that the chipmaker was taking every step to position itself for the next growth market.
Estimated Revenue from non-Smartphone Devices
QUALCOMM, Inc. (NASDAQ:QCOM) has already indicated that it would earn approximately 10% of its estimated total revenue of $26 billion for the year 2015 from non-smartphone devices. That should be a big cushioning factor to offset the weakness from the smartphone segment due to loss from the smartphone segment. The company’s chip has been left out of Samsung (KS:005930) Electronics’s (OTC:SSNLF) Galaxy S6 phones. Analysts’ have also taken into consideration the gain that the American firm may experience while projecting consensus price target of $63.50. Therefore, investors should remain patient and keep faith in the stock rather than pressing the panic button to drag the stock down.
As far as the risk perception is concerned, the past suggested that QUALCOMM, Inc. (NASDAQ:QCOM) would be willing to settle any dispute with regulators. That means the company would prefer to settle the antitrust issue raised by the regulators in South Korea. The chipmaker paid $975 million in February to settle claims made by the Chinese regulators. There is every possibility that the American firm might go in for a settlement. Currently, the investors are not ready to think in terms of that and take it more as a negative factor. The earlier settlement news ignited the stock to rise 5% since it removed the risk factor.
Dividend Yield
QUALCOMM, Inc. (NASDAQ:QCOM) has been paying a dividend since 2003 and boosted the dividend rate in the last four straight years. Though the stock turned ex-dividend currently, it still provides an opportunity to enter the counter. The company has paid a dividend of 48 cents a share for the quarter. Its dividend yield is better than the bonds. The chipmaker’s dividend provided a yield of 4.0%, which was well above the five-year average dividend yield of 2.20%.
Aside from the dividend yield, there is also opportunity to boost the dividend rate in the coming years. Currently, the company’s dividend payout ratio was 51.0%, which was also more than the five-year average dividend payout ratio of 35.0%. QUALCOMM, Inc. (NASDAQ:QCOM)’s dividend witnessed 26.39% growth rate on average for the three-year period while the five-year average growth pace was 35%. For those who are interested in dividend stocks, the shares of the company are a good bet to provide a better yield.
Analysts’ Pick
Bank of America Merrill Lynch (N:BAC) has rated the chipmaker stock as a top pick. Its belief was that it would continue to expand its business in China. The brokerage was also hopeful that the company would finalize its tactical realignment before the end of the current year. Another brokerage, RBC Capital Markets, has reiterated its rating of Outperform on shares of QUALCOMM, Inc. (NASDAQ:QCOM). Its rating indicated that the shares of the company were deeply depressed in valuation apart from pointing out a healthy free cash flow.
RBC analyst, Mark Sue, said that currently the market is pricing royalty rates below 2.8%. The analyst believes that it was too low and unrealistic. That means, better pricing is expected for the royalties due from Chinese smartphone OEMs. One more point was that the chipmaker stock was trading nine times of earnings, excluding cash. That is a sharp discount to Intel Corporation (NASDAQ:O:INTC) that enjoys 14 times of earnings, excluding cash.
There is also another calculation. S&P is priced at a profit earnings ratio of 21 times. At fiscal year 2017 consensus earnings estimations, QUALCOMM, Inc. (NASDAQ:QCOM) shares are trading only at ten times of PE. That suggested a good buying opportunity.
Conclusion
The chipmaker’s advantage is that it is expanding into other non-smartphone devices. The company could very well settle the regulatory issue with South Korea. The PE suggests that shares of QUALCOMM, Inc. (NASDAQ:QCOM) are available at an attractive price currently. Some might believe that the stock has bottomed out and ready for a reversal of fortunes.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.