Legal Cloud Lifts for Qualcomm

06/17/2015 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

This featured value recommendation does not engage in the actual manufacturing process of chips, but licenses many of its 5,700+ patents and intellectual property to manufacturers of wireless equipment, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Qualcomm (QCOM)—through its integrated circuit chipset called Snapdragon—helps power Apple’s iPhones, Google’s Android-based smartphones, and phones made by Samsung, Ericsson, Nokia, LG, Panasonic, and Texas Instruments.

Founded in 1985 in San Diego, California, Qualcomm continues to benefit from the rapid growth of 3G (third generation or Tri-Brand 3G) and 4G Long Term Evolution (LTE) technology for wireless electronics and smartphones in emerging markets, including China. Qualcomm is now the leading provider of LTE technology.

Potential growth for QCOM during the next two years is significant. There are seven billion cellular connections in the world and over half are 2G. This provides QCOM with substantial potential to upgrade systems to 3G or 4G technology.

A regulatory investigation by the Chinese government finally ended in a settlement. Qualcomm will pay a fine of $977 million and the base on which royalties are charged will fall from 100% of the net sale price to 65%.

However, Qualcomm will now be able to pursue Chinese mobile device makers who owe the company royalties, after they refused to pay royalties until the case was settled. The settlement is fair and will likely lift a cloud over QCOM’s stock price.

At 13.4 times current EPS, QCOM shares are a bargain. The balance sheet is very solid with no debt and lots of cash targeted to fund research and expansion.

Qualcomm pays a generous dividend yielding 2.8% per year. I expect QCOM’s stock price to reach my minimum sell price target of $96.70 within one to two years.

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