2017 was almost a flat year for Qualcomm Inc. (QCOM, Financial). Despite several unresolved legal issues and various fines that hit the stock’s bottom-line, it managed to hold up very well.
In fact, shares of Qualcomm are up over 25% from its two-year low mainly due to the news that Broadcom has made a bid to acquire Qualcomm. If the deal fails, it could send the stock lower. However, that would probably be a near-term issue as Qualcomm’s long-term growth remains intact.
In 2017, the company paid a total of $2.6 billion in fines and is still battling an on-going lawsuit filed by Apple over royalty payments.
The chip manufacturing giant has faced similar kind of lawsuits in the past, and will likely find a way to settle the thing with Apple and the U.S. Fair Trade Commission (FTC).
Qualcomm reported its first-quarter results on Jan. 31. For the quarter, the company shared earnings per share of 98 cents, beating analysts' estimate by 7 cents. On the other hand, its revenue came in at $6 billion, again beating the consensus by $70 million. Also, that figure represents a surge of 0.2% year over year.
Despite beating estimates on both the top-line as well as the bottom-line, the stock remained nearly unchanged in after-hours as stockholders were waiting for things to cool down. Moving onward, its operating profit plunged 96% year over year as the company did not receive any royalty payments in the first quarter.
Qualcomm's total revenue in FY17
Source: Statista
The chip manufacturing giant, however, was able to offset a considerable portion of its losses by growing its wireless chip business. Although the company currently generates a significant part of its overall revenue from smartphone chips, it is putting in a lot of effort to diversify its revenue stream by expanding its reach into new areas, such as automotive and connected cars. In the last quarter, the revenue from its chip business grew over 13% year over year.
Apart from this, it is also investing hugely in 5G technology that is about to hit the market. Not only will 5G technology offer fast speed but is also an essential component of the chip manufacturing giant’s Internet of Things (IoT) efforts.
On the other side, Qualcomm is well aware of the Artificial Intelligence’s market potential and has formerly developed an advanced AI platform. As a result, the company’s AI efforts will also gain enormous benefits from its 5G leadership position.
Initially, Broadcom (AVGO, Financial) proposed a deal to acquire Qualcomm for $70 per share. Qualcomm, however, rejected that offer as rumors suggested that Qualcomm shareholders wanted over $80 per share. Considering that, Broadcom recently revealed its final offer for $82 per share. The price comprises $60 per share in cash and remaining as shares.
Also, the offer necessitates the chip manufacturing giant to either complete the acquisition of NXP Semiconductors (NXPI, Financial) at $110 per share or to break the deal. The acquisition was pending mainly due to the approval from EU regulators. However, EU regulators finally approved the takeover of NXP on the condition that Qualcomm will not acquire NXP’s near-field communication (NFC) patents.
Despite receiving approval from EU regulators, it is still not clear whether the deal will get completed as most NXP investors have not tendered their shares.
In spite of not receiving any royalty payment, Qualcomm managed to report a healthy first quarter result, which is impressive. Once Qualcomm gets passed its on-going legal battles, its shareholders will be well positioned to gain tremendous benefits as the company is aggressively trying to expand its reach in various hot growth markets.
Disclosure: No positions in the stocks mentioned in this article.
