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Qualcomm, Inc. Needs a New Direction to Survive

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Qualcomm, Inc. (NASDAQ: QCOM ) faces continued stagnation looking into its last quarterly report of its 2017 fiscal year. QCOM has faced backlash over royalties on its chipsets from the Chinese and South Korean governments as well as Apple Inc. (NASDAQ: AAPL ) and BlackBerry Ltd (NASDAQ: BBRY ). Now, the question isn't whether QCOM stock will beat estimates. The question is, will anyone care?

Qualcomm, Inc. Needs a New Direction to Survive

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Consensus earnings forecasts for QCOM stock stand at 70-cents-per-share. The company has beaten estimates for 11 straight quarters. Little reason exists to believe the September quarter will turn out differently.

Unfortunately for Qualcomm stock investors, beating estimates matters little in an environment of declining revenues and profits. This is especially true given reports that one of its important customers, Apple Inc. (NASDAQ: AAPL ), may be dropping its modems from future iPhones and iPads.

QCOM Stock Needs the NXP Deal to Close

One effort to revitalize the company was the announced intention to purchase NXP Semiconductors NV (NASDAQ: NXPI ), the largest supplier of chips to the automotive sector, for $110-per-share. A move into this sector puts Qualcomm into the soon-to-launch self-driving car industry.

Unfortunately for QCOM, the popularity of the sector has increased dramatically. NXPI currently trades at $116, and the deadline to complete the deal is Nov. 17. One prominent analyst believes Qualcomm will have to raise its offer to $125-per-share to complete the deal. Either way, the QCOM earnings report will likely update shareholders on where this deal stands.

The company has a good reason for wanting to get the deal done. Both revenue and earnings have fallen steadily since 2014. In 2014, revenue stood at almost $26.5 billion, and diluted earnings-per-share (EPS) came in at $4.65-per-share. Analysts predict EPS for 2017 and 2018 at $3.66- and $3.30-per-share respectively. A new source of revenue could turn the declines around.

Can Qualcomm Follow Nvidia's Footsteps?

QCOM finds itself in a similar position to where Nvidia Corporation (NASDAQ: NVDA ) was a few years ago. In the first half of the decade, NVDA stock stagnated as the company's gaming chips had flat demand. The company slowly diversified into artificial intelligence (AI), digital currencies and hopefully like QCOM, self-driving cars. As a result, NVDA stock has risen eleven-fold in the last three years. While QCOM stock is unlikely to rise by 11 times, an acquisition of NXP and a move into self-driving cars could revitalize the equity.

Bottom Line on Qualcomm Stock

The prospect of being involved in the self-driving car space isn't the only thing that is holding QCOM stock together right now. QCOM stock pays a high dividend, at least compared with other tech stocks.

The company has paid a dividend every year since 2003. That dividend has increased every year since, and the 2017 increase brings the annual dividend to $2.28-per-share. This represents a dividend yield of 4% for Qualcomm stock, more than twice the S&P 500 average.

The dividend could provide another incentive to buy QCOM stock. Hence, when earnings are released after the bell on Nov. 1, investors should look not so much at earnings. They should look at the NXPI deal and any other possible purchases. Big moves into new, up-and-coming industries could indicate the equity will follow the path of Nvidia. A slower-moving strategy could show that Qualcomm will behave like a mature, slower-growth tech companies such as Intel Corporation (NASDAQ: INTC ) or Texas Instruments Incorporated (NYSE: TXN ).

QCOM stock will likely beat estimates on Nov. 1. The question is, will the company give stockholders any reason to care. Slowing revenue and earnings on maturing product lines have caused the stock to decline, and the fact that Apple may drop QCOM's hardware completely has only added to the pain.

However, with its high dividend and the completion of its acquisition of NXPI, Qualcomm could again place itself on a higher growth path. Qualcomm stock investors should move in if the company remakes itself.

But, ultimately, if the NXP deal falls through, and no path to new growth exists for QCOM stock, investors should avoid it.

As of this writing, Will Healy did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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