Qualcomm Inc. (QCOM, Financial) rewarded shareholders with high returns in 2016, but the stock was off to a gloomy start this year as it tumbled approximately 20% over the starting three months. The stock, however, has regained its lost momentum as it is down 11% year to date and looks like it will soon find its way into the green.
The reasons for Qualcomm’s drop this year were legal issues with Blackberry (BBRY) and Apple (AAPL). Moreover, the Federal Trade Commission (FTC) also charged the company with using anti-competitive strategies to build a monopoly in baseband processors. Despite all these issues, the fundamentals of the chip manufacturing giant have largely remained intact.
Qualcomm reported better-than-expected second-quarter results. For the quarter, the chip manufacturing giant posted earnings per share of $1.34, beating analysts' estimates by 14 cents. On the other hand, its revenue came in at $6 billion, again beating the consensus by $90 million.
Most important, that figure signifies year-over-year growth of 9.1% compared to a drop of 19.4% in the same quarter of fiscal 2016.
A few months ago, Qualcomm launched its latest Snapdragon 835 processor which offers comparatively higher performance and power over the company’s previous generation Snapdragon processors. The company detailed that it is seeing robust demand exceeding supply for the Snapdragon 835 premium tier chipset.
Qualcomm’s Snapdragon 835 is being used in almost every high-end device including Samsung Galaxy S8/S8+, Xiaomi Mi 6, Sony Xperia XZ premium and upcoming OnePlus 5. The company’s growth in operating margin comparative to demand is being restricted by its ability to ramp volumes at 10 nanometer and expects this to begin to normalize in the last quarter of fiscal 2017.
Qualcomm, however, is losing its monopoly in the mobile chipset market as it continues facing fierce competition from small rivals. Not only had this but high-end smartphone manufacturers such as Samsung, are nowadays in favor of manufacturing chips on their own to power high-end smartphones.
Therefore, to overcome the competition, the chip manufacturing giant is focusing on several other growth areas such as Internet of Things, networking, data centers and automotive. Moreover, the company should also benefit from the upcoming “5G” network.
In fact, the company carries on investing in these areas and took a massive step forward with its acquisition of NXP Semiconductor, a leader in the automotive space, for $47 billion. As a result, the acquisition will certainly help Qualcomm gain a strong lead in the highly competitive automotive market.
On the other hand, Qualcomm’s QTL business also performed very well, as it reported device sales of $82.6 billion, up nearly 18% year over year.
Apart from this, Qualcomm also raised its dividend by 7.5% to $2.28 per share. Currently, the company offers a stunning dividend yield of 3.96%, which looks highly impressive.
Summing up
Qualcomm performed very well in 2016 and continues to display strong performance this year as well. Although regulatory issues, as well as several lawsuits, have weighed down the stock price this year, its long-term prospects still look healthy.
The company is aggressively focusing on several other growth areas which will indeed reap fruitful results in the long run. Moreover, Qualcomm’s dividend looks safe, which is reinforced by robust cash flow and a low payout ratio. On the other hand, the stock currently trades at a price-earnings (P/E) ratio of approximately 19, suggesting it still has massive upside potential.
As a result, Qualcomm is a buy at the current market price, as it is down nearly 16% from its 52-week high.
Disclosure: No position in the stocks mentioned in this article.
