MorningWord 1/21/15: $QCOM – Korean BBQ’ed

by Dan January 21, 2015 9:29 am • Commentary

Qualcomm (QCOM) is trading down about 3% in the pre-market on headlines that Samsung will be replacing a QCOM chip in their high-end Galaxy S phone, per Bloomberg:



If true this is obviously very bad news for QCOM as Samsung is their second largest customer at 12% of sales, followed by Apple (AAPL) at 9%.  Could AAPL be next? They have done similar in another instance, replacing Intel (INTC) chips with their own proprietary technology in computers. But it’s not likely, as AAPL does design their own mobile chips, but uses the following smaller QCOM parts in the iPhone 6, per iFixit’s teardown:

-Qualcomm MDM9625M LTE Modem
-Qualcomm QFE1000 Envelope Tracking IC
-Qualcomm WFR1620 receive-only companion chip.
-Qualcomm PM8019 Power Management IC

So let’s see where the stock settles today and how it trades into Tuesday’s fiscal Q1 results.  Obviously, expectations are not high as Wall Street consensus is calling for a 1% decline in in earnings year over year (after posting a 17% gain in fiscal 2014) on the lowest expected sales growth since 2009 (only 5%.) The company has a multi-billion share buyback in place, pays a dividend that yields 2.3% and has a stellar balance sheet with NO debt and 27% of their $117 billion market cap in cash.  And the stock trades at its lowest earnings multiple in ten years:

QCOM P/E 10yr chart from Bloomberg
QCOM P/E 10yr chart from Bloomberg

How in the world have activists side stepped this company?  Especially in a period where some have turned their sites to much larger prey in the last year  (Icahn with AAPL & EBAY and Ackman with PG & FDX.)  At the very least activists could make some noise about greater cash return in the form of buybacks or a special dividend.

But what about a merger with PC and server chip behemoth INTC who has been losing billions in their efforts to break into the mobile chip business.  Given both companies lack of overlap in their core, I suspect there would be little concern by regulators as one is factory heavy while the other is basically factory-less.  The combination would create a $300 billion market cap company that could better compete with Chinese rip-offs and with Samsung.  Also, given the proximity of both companies in California, there are cost savings from redundancies.  Both companies are cash rich with what would be a tiny debt load (just INTC’s $14 billion) so the combined entity could lever up in a massive way while rates are still very low.  Debt would likely be a huge part of getting a deal done that would be acceptable to QCOM shareholders.  As for shareholders, Blackrock, Vanguard and State Street own a combined 16% of each company and would likely see both stocks appreciate on a proposed merger.

I know its kind of pie in the sky sort of stuff, but it seems like the worse the news gets for QCOM, greater emphasis will be placed on their balance sheet.  If I were a shareholder suffering through the massive under-performance of the last couple years I would have less confidence in their ability to turn it around after mis-execution in the greatest mobile bull market of the last decade and prefer a combination.  The stock is on our radar, and has been for some time as we have preferred to take shots on long side when the stock is oversold (most recent trade here). We will wait and see what next week’s earnings and guidance brings.