Is Qualcomm a Falling Knife Worth Catching?

As someone who likes bottom-fishing stocks, I have really liked Qualcomm (QCOM) for the last few weeks. Due to multiple concerns in 2016, shares of Qualcomm had dipped to 52-week lows. However, Qualcomm has shown great resilience and has bounced back nicely from its 52-week lows.

With the stock still trading a lot lower than its 2015 value, I think investors can still consider buying Qualcomm for the long-run.

For quite some time, Qualcomm was going head-to-head with chip manufacturing giant NVIDIA (NVDA). NVIDIA struggled to directly compete with its Tegra mobile chips based on graphics, whereas the quick adoption of smartphones generated an enormous market for Qualcomm’s mobile processors.
However, rivalry was ferocious, and NVIDIA ultimately left the trending smartphone market for greener pastures.

Although NVIDIA shifted its focus away from the smartphone market, it grasped a robust position in the GPU market. Apart from the GPU market, NVIDIA is also seeking further growth in the data center and automotive divisions. In the meantime, Qualcomm reported a loss of revenue and profits mainly due to the decelerating smartphone market, rising competition, as well as licensing concerns in China.

Qualcomm, despite being hurt in 2015 mainly because Samsung eliminated the company’s snapdragon 810 processor from its flagship phones Galaxy S6/S6 EDGE, gained back market share this year due to the presence of Snapdragon 820 in Galaxy S7/S7 Edge.

In spite of recent drops, the good news for Qualcomm is that its licensing business remains a significant source of profits. Throughout the second quarter, the revenue generated from the licensing division fell 12 percent y-o-y and pre-tax profit declined 14 percent, but the division still generated $1.86 billion of pre-tax profit, as compared to just $170 million generated from the chip division.

It has always been risky for stockholders to buy shares of a company with dropped earnings, but Qualcomm’s licensing business delivers the company with an equally stable source of profits. Apart from this, Qualcomm also has a very generous dividend yield, thereby making it my favorite falling knife.

The only issue that is creating a problem for Qualcomm is its over-dependence on the mobile market, and though the company’s prospects in the Internet of Things market and ARM server chips is strong, the company’s success in those segments is far from an assured thing.

Qualcomm needs its smartphone business to perform well. With Samsung’s Galaxy S7 exceeding sales expectations and beating its predecessor by a wide margin, I think Qualcomm is a worthy pick right now.
Published on May 4, 2016
By Prudent Investor

Copyrighted 2020. Content published with author's permission.

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