Qualcomm and Yahoo: Out-of-favor Special Situations

12/09/2015 10:00 am EST


Charles Carlson

Editor, DRIP Investor

Chuck Carlson, editor of DRIP Investor, steps a bit outside of his typical focus on high quality blue chips to discuss two out-of-favor technology ideas where he sees limited downside price risk and longer-term turnaround potential.

Steven Halpern:  How are you doing today, Chuck?  

Chuck Carlson:  I’m fine, Steven, thank you.

Steven Halpern:  Now, in your latest issue of the DRIP Investor, you highlight a pair of high-tech companies that are both out-of-favor on Wall Street.  Let’s start with Qualcomm (QCOM), which you point out is trading at around its lowest level in four years. What’s behind this underperformance?

Chuck Carlson: Well, there are a number of factors that are hurting the stock right now. Qualcomm is a chip company that has a substantial licensing business.  

In fact, the majority of their profits come from licensing their technology and they’re running into some issues on this front, specifically in China where they’re having some difficulty getting people to pay them for those licenses.  

That seems to be starting to get resolved. Qualcomm just announced earlier this week, for example, that they did sign a licensing deal with one of the prominent smartphone carriers in China and I suspect that will continue to get worked out.

But it has hurt the stock in the short-term, as has been the case of increased competition, as well as technology companies starting to do their own in-house chip so they face some competitive headwinds, but the biggest issue was really their licensing business and how that was being impacted by overseas partners either underpaying or refusing to pay the licensing fees owed to Qualcomm.  

Steven Halpern:  From an investment standpoint, do you believe the worst is already priced into the stock at this point?

Chuck Carlson:  Yeah, I do. These issues, while they seem to be a little bit more larger than they have in the past, nevertheless is something that Qualcomm has typically been able to work out in the past.

And I think—while it will take some time—I think you’ll continue to see some announcements like we saw earlier this week where they seem to be starting to iron out some of those issues.  

Secondly, Qualcomm is still a pretty solid technology company with high level of research and creating new products and I think that’s something that will continue to help the company going forward as they continue to develop and create new products.  Finally, when you look at the stock, it does seem pretty cheap to me.  

Again, cheap stocks can get cheaper, but if you’re looking at it based on the P/E ratio, based on just a piece of the stock, it’s got cash and cash takes up about 25% of the stock value right now. That’s just the company’s cash on hand; so when you look at those factors, yes, I think there’s probably pretty good value there.

Steven Halpern:  Now, you also note that activist investors have been pressuring the company.  Could you explain what’s going on there?

Chuck Carlson:  Yes.  There has been some activist investors that have called on the company to, in effect, restructure and split the company into two pieces. One, the licensing business, and two, their chipset business.

Qualcomm is active right now doing their own kind of project—looking at the feasibility and the attractiveness of doing it—so there are some outside catalysts there that could prod the company into a restructuring, and typically Wall Street likes those sorts of restructuring, so there’s yet another kind of catalyst that can move the stock higher.

Steven Halpern:  Now, typically in the stocks you cover, there’s a solid dividend component. Is that the case here as well?


Chuck Carlson:  It is. The stock’s yielding almost 4% and the dividend is well covered by earnings. In fact, I think the dividend will grow at least 8% to 10% in 2016 so that’s another reason to take a look at the stock, you get paid while you wait for the stock to turn around.

So it’s not dead money; you can be earning close to 4% on that dividend yield while the company and the stock rebound. So, in that respect, it reduces, I think, your risk component on the stock given the yield flow.  

Steven Halpern:  Now, you also look at Yahoo (YHOO), which, again, you note has few friends on Wall Street, yet you see some reasons to be optimistic.  What are the challenges Yahoo is facing?

Chuck Carlson:  Well, they’ve struggled to really grow their search business and ad business.  In fact, there’s continued attrition there. They’ve done a fair amount of acquisitions to try to spark growth and I’m not sure they have a whole lot to show for that.

So there are strong competitive headwinds in that business right now and that’s one of the factors that has hurt the stock.  On the plus side, they do have some interesting assets, not the least of which is a pretty substantial holding in Alibaba (BABA) that is valued anywhere from about $25 billion to $30 billion.  

They have a pretty significant equity interest in Yahoo Japan that’s probably valued anywhere from $5 billion to $10 billion, so when you add up those kinds of outside equity interests they have, Wall Street is basically valuing its core business at virtually nothing.

And while they have struggled, Yahoo’s core business still has 200 million visitors which I think is third, behind Google (GOOGL) and Facebook (FB), in terms of the volume of visitors and there is value there.  

Yahoo has had some trouble monetizing that, but there certainly is value there that could be appealing to an outside firm, for example, and just only recently, within the last few days, I guess, the board of directors of Yahoo is looking into basically what to do with the company at this point.  

Should they go ahead with the spin-off of the Alibaba shares, should they sell their core business, and again, so you have these outside potential catalysts, not the least of which again is another activist investor who’s poking and prodding at Yahoo that you could get kind of an event that could jump start the stock higher.

So I think your downside is protected to some extent by the sum of the parts analysis where, when you look at the values of what the company has, it looks like there’s a pretty solid floor in place in the $28 to $32 range and so I don’t see a whole lot of downside here and I see a pretty good upside if you do get some of these catalysts come to fruition.  

Steven Halpern:  Now, finally, the two stocks that you’ve discussed today are a bit of a departure from your more typical focus on very high-quality blue chips. Could you address the risk aspects of these two ideas?

Chuck Carlson:  Well, you’re right and that’s why I kind of classify them as special situations.  They don’t fit neatly into a pattern of buying high quality stocks where they have strong operating momentum because neither one of them does.

They are more kind of plays on, these are companies that historically, well in the case of Qualcomm have done pretty well.  They’ve hit some rough times.  There are exogenous factors that could push to have the value, the hidden value—or the unrealized value—realized and I think they’ve been beaten up so much that I don’t think there’s a tremendous amount of downside.  

The biggest risk probably is more dead money if in fact some of these things don’t come to fruition you may see the stocks just kind of meander around where they are right now so I don’t see big collapses for them as the major risk.  The major risk is just that you’re putting money in that could be dead for a period of time.

Steven Halpern:  Again, our guest is Chuck Carlson, editor of DRIP Investor. Thank you so much for your time today.

Chuck Carlson:  Thank you.  

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