I have been bullish on Qualcomm (QCOM, Financial) for quite some time now, and the stock has yielded over 40% returns since my initial buy recommendation.
Although Qualcomm may face some selling pressure in the short term, I expect the stock to continue moving higher in the mid to long term. I have become even more bullish on Qualcomm’s prospects ever since the rumors of a potential NXP Semiconductors (NXPI, Financial) buyout emerged.
At present, Qualcomm CDMA Technologies (QCT) as well as Qualcomm Technology Licensing (QTL) account for the company's two most significant sections. QCT, Qualcomm’s chip business, controls revenue production, having produced sales in the range of 68% and 71% of the company’s overall sales in the prior three years whereas the licensing division generates an uneven amount of the company’s operating profits.
In 2015, Qualcomm faced some problems mainly because Samsung decided to exclude its Snapdragon processor from flagship Galaxy S6 models. Moreover, the company reported considerable revenue decline in the prior four out of five quarters.
However, in the previous quarter, the company posted a revenue surge of 3.6% year over year. Obviously, that’s not a whopping surge, but it certainly suggests the company has started to move in the right direction.
Sales of mobile processors as well as modems were the primary reasons behind the company’s escalated revenue in the last quarter. Moreover, the company has successfully managed to entice various Chinese smartphone manufacturers and magnify its sales.
By adding more and more Chinese smartphone manufacturers, the company can carry on tapping that evolving market, mainly as the majority of companies expand the list of high-end as well as mid-range devices.
Qualcomm faces tough competition from rival Intel (INTC, Financial). Recently, Apple released its new iPhone 7/7 Plus, and Qualcomm’s modem is used in some of those devices, whereas all the other devices are powered by Intel’s modem.
A few years ago, Qualcomm was the top modem supplier for the iPhone. However, Qualcomm has since strategized to diversify its business, and the company recently publicized that it has plans to acquire NXP Semiconductors, which has been seen as a positive development by the market given that shares of both Qualcomm and NXP went up after the rumors.
As a result, it makes a lot of sense for the company to reduce its dependence on the smartphone market and inflate its automotive semiconductor chips business with an acquisition of NXP, which already holds a significant position in the automotive industry.
Conclusion
A potential buyout of NXP Semiconductors would be a great deal for Qualcomm as it will allow it to strengthen its mobile business as well as strengthen its automotive business. That being said, I don’t think NXP investors will be happy with the deal unless the premium involved is huge as the company had the potential to perform really well in the long term.
Disclosure: I don't hold a position in the stocks mentioned in the article.
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