First it was Apple (NASDAQ: AAPL).
On Jan. 20, Apple filed a $1 billion lawsuit against Qualcomm (NASDAQ: QCOM), the primary chip supplier for its iPhone line of smartphones. Apple claimed that Qualcomm was a monopolist and as such it overcharged Apple for royalties on the Qualcomm chips used in iPhones.
When news of the lawsuit hit, Qualcomm shares plunged 17%. They continued to spiral down in the weeks afterward. Shares that were priced to offer a 3% dividend yield were now priced to yield well over 4%. The question for Qualcomm investors was whether to cut bait on the heightened uncertainty or to pick up additional yield at the lower price.
The answer was to pick up additional yield at the lower price. Cooler heads soon prevailed and Qualcomm shares were on the road to recovery. Qualcomm shares were up 14% from the post-Apple blowout heading into April.
Qualcomm Shares Hit Again
That is, they were up until this week when BlackBerry (NASDAQ: BBRY) took its shot at the royalties Qualcomm collects.
News hit Wednesday that the also-ran smartphone provider and wannabe software-developer was able extract $814.9 million in a royalty refunds from Qualcomm. In this case, the case is closed. Because the matter was resolved through arbitration, Qualcomm has no opportunity to appeal.
Qualcomm shares dropped 6% on the BlackBerry news. Its shares are again priced to yield well over 4%. Again, we face the same question: cut bait or pick up additional yield at the lower price?
Repetition can be tedious, but repetitive I must be. The answer remains the same: pick up additional yield.
To be sure, $814.9 million is more than chump change. The payout will leave a bruise, but it’s a bruise Qualcomm can easily endure. Financial bruises heal readily for a company that regularly generates in excess of $5.5 billion of free cash flow annually.
As for Apple’s royalty claims, the lawsuit lingers, but Qualcomm has taken a more aggressive stance in defending its turf. Qualcomm recently countersued, claiming that Apple breached its agreements and encouraged regulatory attacks by misrepresenting facts.
Memories of the BlackBerry extraction will fade soon enough. The Apple imbroglio lingers, but the imbroglio should be kept in perspective.
The fact is that Qualcomm remains Apple’s best alternative for smartphone chips. In Qualcomm’s conference call to discuss its quarterly earnings earlier this year, CEO Steve Mollenkopf said that there is “no better long-term partner for Apple than Qualcomm.” Mollenkopf also reassured analysts that Qualcomm intends to remain a leading supplier to Apple.
Qualcomm also intends to remain a leading chip supplier to Apple competitor Samsung (OTC: SSNLF), which sold more smartphones in the first quarter of 2017 than Apple. The Samsung’s sales trend should continue, as consumer focus shifts more toward the advantages of the new Galaxy 8 line of smartphones and away from the problems of the Galaxy 7 line.
Innovation Beyond Smartphones
As for Qualcomm, its innovating and expanding beyond smartphones. Its new Snapdragon processor for the wearables market – watches, fitness trackers, smart headsets, and wearable accessories – is gaining wide acceptance.
Qualcomm will expand further this year, following the $47-billion acquisition of NXP Semiconductors (NASDAQ: NXPI) last November. NXP is one of the world’s largest developers of chips for automobiles. Qualcomm is betting big on cars becoming the next smartphone – a device that rolls together communications and services once handled by several other devices.
Qualcomm has plenty of opportunities to expand the franchise, and these opportunities are offered at a value price today: Qualcomm shares trades at less than 12 times 2017 EPS estimates; its peer group trades at 15 times. Qualcomm’s five-year average is 18.
And let’s not overlook the dividend, which yields 4.3% as I write. The dividend has increased at a 15% average annual rate over the past 10 years. Qualcomm has morphed into a first-rate dividend grower. More recently, it has morphed into a prolific buyer of its own shares. Qjualcomm shares outstanding have been reduced 15% since 2013.
Qualcomm has offered investors two buying opportunities in as many months to lock in a high dividend yield. I suspect that the royalty-busting game among its customers is just about played out. The odds of a third opportunity in the future are low.