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Should I Buy Qualcomm, Inc. (QCOM) Stock? 3 Pros, 3 Cons

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A few years ago, Qualcomm, Inc. (NASDAQ: QCOM ) seemed like a sure bet. Hey, with its CDMA platform, the company was at the heart of the fast-growing mobile market. QCOM stock was essentially a cash machine.

Go Long This Qualcomm, Inc. Pop for Free (QCOM)

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Yet lately the company has been in a slump. Since the summer of 2014, QCOM stock has lost about a third of its value. Of course, the tech industry is chock-full of examples of darlings that fell on hard times.

And yes, it can take time to get back into growth mode again. Although, when this happens, the gains can certainly be standout. Just look at the comeback of Microsoft Corporation (NASDAQ: MSFT ), which is up about 90% during the past couple years.

So in the case of Qualcomm stock, is there much upside or should investors remain wary? Let's take a look at three pros and three cons and find out:

QCOM Stock Pros

Mobile Powerhouse: The roots of QCOM go back to the mid-1980s, when seven engineers teamed up to capitalize on the mobile industry. At first they focused on technologies to provide location-based services and messaging for the trucking industry. Then after a few years, QCOM would go big - that is, develop a standard, called CDMA, which would allow for better cellular communications.

The business model was to license the technology, which would mean getting aggressive with patents. While success was not immediate, QCOM was determined to make CDMA a critical part of the mobile industry. And of course, this wager ultimately paid off handsomely. For example, just some of QCOM's marquee customers include Apple Inc. (NASDAQ: AAPL ), Samsung Electronics (OTCMKTS: SSNLF ), Xiaomi and Alphabet Inc (NASDAQ: GOOGL , NASDAQ: GOOG ).

Megatrends: The mobile market is expected to grow at a nice pace, which should mean continued demand for Qualcomm offerings. There are currently about 4 billion 3G/4G connections using CMDA systems and this is expected to increase to 6.4 billion by 2020 . But there should also be substantial benefits from the emergence of 5G technologies. These will allow for better performance for the Internet of Things (IoT), wearables, autonomous vehicles, virtual reality and even remote medical procedures. While QCOM's R&D investments will be vital for capitalizing on these trends, the company has also ramped upped its deal-making. No doubt, the most notable example of this is the proposed $38 billion acquisition of NXP Semiconductors NV (NASDAQ: NXPI ). Note that the company is one of the top players in the fast-growing market for self-driving cars.

Financials: Granted, QCOM's revenues are not growing at a fast clip. In the latest quarter, there was a 4% increase . But then again, the company is fairly mature, so it can be tough to churn out strong growth. Yet QCOM remains a highly profitable business, with fiscal 2016 net income coming to $6.7 billion . The company has also been shareholder friendly. Keep in mind that the current yield is at an attractive 4%.

QCOM Stock Cons

Litigation: Because of the extensive patent portfolio, QCOM collects a hefty royalty from most sales of smartphones across the globe - even for those devices that do not even include any of the technology! So as should be no surprise, there is much concern about this. The Chinese government challenged QCOM's practices , and the case was eventually settled.

But there are other major cases that are in the early stages, such as in South Korea, Europe and the U.S. Oh, and Apple has also launched several major lawsuits against QCOM . The company certainly has tremendous resources to wage a brutal fight. Now as with any legal dispute, it is tough to predict the outcome. But if QCOM ultimately loses, then its core business model will be in jeopardy and this could certainly have horrendous consequences. Keep in mind that the company gets about 80% of its pretax profits from licensing .

Trump Factor: A key part of the president's agenda is to get tough against China, which Trump considers a currency manipulator. He has also called for stiff tariffs and sanctions. So if there is a trade war, the impact is likely to be adverse to U.S.-based companies that derives substantial revenues from China. Let's face it, the government is cracking down, favoring domestic-based operators over foreign ones. All in all, this poses material risks for QCOM. After all, about 57% of revenues come from China and Hong Kong.

Competition: It is intense. Some of the tough rivals include Broadcom Ltd (NASDAQ: AVGO ) and Texas Instruments Incorporated (NASDAQ: TXN ). There are also a variety of startups that are gunning for the mobile market. Yet Intel Corporation (NASDAQ: INTC ) may ultimately be the biggest threat to Qualcomm. Last year, Intel entered an agreement with Apple to supply chips. Before this, QCOM was the sole supplier .

In other words, if the legal battles go against the company, Intel may be in a better position to snag more and more business.

Bottom Line on QCOM Stock

With the recent slide in Qualcomm stock, the valuation is definitely attractive. Consider that the forward price-to-earnings multiple is only about 11.5X.

But this may not matter much. For the most part, the impact of the litigation is far from clear - and of course, legal disputes often move at a glacial pace. So in light of this, it's probably best to avoid QCOM stock for now.

Tom Taulli runs the InvestorPlace blogIPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com . Follow him on Twitter at @ttaulli . As of this writing, he did not hold a position in any of the aforementioned securities.

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The post Should I Buy Qualcomm, Inc. (QCOM) Stock? 3 Pros, 3 Cons appeared first on InvestorPlace .

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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