Qualcomm: Smart Phones to Smart Cars

05/24/2017 2:52 am EST

Focus: TECHNOLOGY

Briton Ryle

Editor, The Wealth Advisory

This month’s feature recommendation is Qualcomm (QCOM) — the company that grew exponentially thanks to both the internet revolution and the explosion of smartphones, asserts Brit Ryle, growth & income expert and editor of The Wealth Advisory.

Not only does it have the best cellular modem chips, but it also has some of the cheapest and most powerful processors on the market.

The elephant in the room, however, is that Apple (AAPL) announced a lawsuit against Qualcomm earlier this year. Qualcomm’s fell over 20% in a couple of days.

Apple alleges that Qualcomm uses unfair business practices to get phone-makers to use its chips. The company complains that not only does Qualcomm charge high licensing fees for its patents, but it also withholds rebate payments from companies that don’t do exactly what it wants.

Qualcomm’s management says, “False!” They don’t think there’s anything unfair about their fees. When it comes to the rebates, they say those are for companies who agree to only use Qualcomm’s modem chips.

If you use somebody else’s as well — like Apple does — then you don’t get the rebates. And that’s clearly spelled out in the contracts the companies sign.

Qualcomm will let the courts decide this one. It’s also countersuing Apple for misleading customers about how much better its chips are than the other companies Apple uses.

The market seems to think Qualcomm won’t come out on top here and has already priced in a potential $2 billion settlement. Just one look at Qualcomm’s valuation shows you exactly how priced in the settlement is.

On just about every valuation metric, Qualcomm is at a discount to both the industry and its historical averages. My favorite metric to see if a company is undervalued (EBITDA/EV) sits at an enviable 9.86. Anything at 10 or under means the shares are worth more than what they’re selling for.

It’s trading at a nice discount to its enterprise value, too. So, it’s obvious that any loss to Apple has already been factored into the stock.

If the company loses the suit, the stock will remain mostly unchanged. It may even move up when people realize how little the loss affected the earnings. If Qualcomm wins, the stock will shoot up because there’s a few billion in losses priced in that won’t happen.

Lawsuit or no, win or lose, Qualcomm is a solid investment that’s about to see some serious growth. Thanks to its dominance in the modem chip business, and its super-powerful and super-affordable processors, this company’s products will be a standard part of smartphones for a long time.

It’s already the chosen supplier for the majority of the companies that make affordable fingerprint-capable smartphones.

As the biometric banking trend continues to rev up across the world, those processors will become essential for folks who can’t afford to spend several hundred dollars on a new phone.

Qualcomm's purchase of NXP Semiconductors puts it right in the midst of the driverless car market. NXP also has the Official Pilot Company contract for smart car development in China. That means huge profits in the coming years.

When you factor in the rest of the developing world and the necessity for its top-of-the-line modem chips, revenues will skyrocket. Qualcomm is a buy anywhere under $55. I have a 12-month price target of $85.

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