Qualcomm: China Plays Hardball

12/16/2014 8:00 am EST


Charles Carlson

Editor, DRIP Investor

This chip maker is in some of the fastest-growing areas in the communications sector, its dividend has been growing by leaps and bounds, and the firm’s balance sheet is pristine, with lots of cash and virtually no debt, notes Chuck Carlson, editor of DRIP Investor.

Indeed, I have been a big booster of Qualcomm (QCOM) stock in recent years, with good reason. So why is the stock selling off so sharply?

One word: China. The largest market in the world for smart devices is playing hardball with Qualcomm.

Chinese regulators are investigating the company for “monopoly practices,” and China firms are either not paying their share of royalties that they owe Qualcomm or delaying licensing negotiations until the regulatory matter is resolved.

Admittedly, the situation looks a bit grim in the short-run. The question is whether the short-run problems turn into long-range headaches for the company.

Investors looking for market-beating returns over the next 12 months may want to look elsewhere. However, patient investors looking for bargains may want to put Qualcomm high on their watch list.

Qualcomm is a world leader in 3G, 4G, and next-generation wireless technologies. About half of its revenue comes from China, so problems in this market are a big deal.

Qualcomm has more than enough financial firepower to pay even a stiff fine; the firm had $32 billion in cash at the end of September and virtually no debt.

But it is the prospect of China regulators forcing some major changes in how Qualcomm sets royalties or continuing to undermine Qualcomm’s ability to collect those royalties that is worrying investors.

Another major fear for investors is if Qualcomm’s problems spread to other emerging markets in which the company does business.

QCOM trades at just 14 times fiscal 2015 earnings estimate of $5.22. If you wash out the $19 per share in cash the firm holds on its balance sheet, the stock trades at less than ten times earnings.

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