Is It Time to Go Bottom-Fishing With Qualcomm?

After facing many troubles in 2015, it finally looks like the Qualcomm (QCOM) boat is stabilizing. Having lost Samsung’s business, Qualcomm was in troubled waters in 2015, but the chipmaker has since taken many steps to improve its business. Qualcomm is entering into many new markets and can benefit if it manages to outwit the competition.

However, it is Qualcomm’s core business that should help propel it forward in 2016. During the past two years, Qualcomm has gone through several major problems. In the case of the chip manufacturing business, which accounts for the major portion of Ambarella’s overall revenue, the company has lost a lot of market share to low-cost competitors such as Media Tek.
In the meantime, the company’s patent licensing business is targeted by margin-famished smartphone manufacturers and government regulators demanding lesser fees.

In the most recent quarter, Qualcomm’s chip manufacturing revenue dropped 22 percent on a year over year basis as operating profit declined by about 50 percent. Apart from this, Qualcomm’s overall sales dropped 19 percent. These inferior numbers suggest that its stock possibly would not improve immediately, but its forward dividend yield of 4.2 percent might help the company to recover at a rapid pace.

Furthermore, major firms like Samsung, Xiaomi, using Qualcomm’s Snapdragon 820 processor are completely satisfied with its performance. It is highly likely that the noticeable sales trend of Xiaomi Mi5 and Samsung Galaxy S7/S7 Edge will help Qualcomm this year. Enhanced sales of greater margin Snapdragon processor could reimburse for any drop in modem sales for the upcoming iPhone 7.

Initially, Samsung’s denial of using Snapdragon 810 processor accounted for a 14 percent drop in the company’s mobile processor shipments in 2015 but gaining back the support of Samsung is a massive improvement to its revenue in 2016.

Furthermore, it is highly likely that Samsung sooner or later will use the Qualcomm’s Snapdragon 820 processor in non-U.S. models of the Galaxy S7. Most of the users now are in favour of buying the smartphone that supports high-end gaming. Potential users might avoid Samsung’s Galaxy S7 as compared to the Xiaomi Mi5 because of its advanced Adreno 530 GPU, but in every case, Qualcomm will be on the safe side.

Final Words

Given the beaten down valuation, I think Qualcomm is a former-falling knife that is now safe to catch. All the bad news is already baked into Qualcomm’s current share price, thereby making it an ideal stock for bottom-fishers.

Moreover, with Qualcomm’s Snapdragon business expected to grow considerably year over year, I think the stock has nowhere to go but higher.
Published on Apr 26, 2016
By Prudent Investor

Copyrighted 2016. Content published with author's permission.

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