What's Next for Qualcomm Stock? (QCOM)

Qualcomm stock

Qualcomm stock today is at a crossroads.

Faced with pressure from multiple directions, Qualcomm Inc. (Nasdaq: QCOM) management needs to make some hard choices over the next few months.

Qualcomm stockAn investor favorite for years, QCOM stock hasn't fared so well over the past year, mostly on concerns over slowing growth. Qualcomm shares are down more than 13% over the past 12 months.

And the drooping Qualcomm stock price led directly to another issue - demands from activist investor Jana Partners to buy back more stock and split the company in two. Jana, which holds a $2 billion stake in Qualcomm, wants the company to spin off its chip-making division, retaining the more profitable division that reaps profits from licensing its patents.

Management of San Diego-based Qualcomm unveiled a plan in March to buy back $15 billion worth of QCOM stock. It has resisted Jana's calls to split up the company, however.

Then a fresh source of pressure erupted. Over the past few months a wave of large mergers has transformed the semiconductor industry. So far we've seen three major deals:

  • NXP Semiconductors NV (Nasdaq: NXPI) bought Freescale Semiconductor Ltd. (NYSE: FSL) for $11.8 billion.
  • Avago Technologies Ltd. (Nasdaq: AVGO) bought Broadcom Corp. (Nasdaq: BRCM) for $37 billion.
  • Intel Corp. (Nasdaq: INTC) bought Altera Corp. (Nasdaq: ALTR) for $16.7 billion.

Qualcomm has made smaller acquisitions in the past, most recently paying $2.5 billion for UK-based Cambridge Silicon Radio last year. CSR makes chips for autos, audio devices, and wearable tech.

But suddenly its competitors have grown much stronger. Intel now has a bigger edge in the datacenter chip business - an area Qualcomm had targeted for growth. And the Broadcom-Avago matchup has created a tougher rival in mobile, a market Qualcomm now dominates.

Now the company needs to review its options and take action. Those buybacks won't prop up Qualcomm stock forever.

"Either divest themselves of the business that they are in that is in direct competition with Broadcom - and now Avago - or find a way to grow their presence," Chris Geier, partner-in-charge of Sikich Investment Banking, told Reuters. "They are going to have to do one or the other. The status quo for them at this point won't work."

Let's take a closer look at some of the moves Qualcomm could make...

A Rebound in Qualcomm Stock Depends on What Happens Next

The company can't afford to wait too long. With impatient investors and beefed up rivals, time has become Qualcomm's enemy.

Here are QCOM's choices:
Qualcomm Stock Revival Option No. 1: Split the Company in Two
This is the Jana option. Actually, Qualcomm itself considered splitting itself up 15 years ago but decided against it. While Qualcomm is best known as the world's largest supplier of chips for mobile phones, its patent-licensing business accounts for about two-thirds of its profits.

Jana believes separating the businesses will make both worth more. Arete Research Services estimated in March that the standalone chip business would be worth about $74 billion, while the licensing business would be worth $87 billion. That's a 40% increase over Qualcomm's current market cap. And the individual companies could become acquisition targets, which would result in an even higher payoff for those owning Qualcomm stock.

QCOM executives so far said that it makes more sense to keep the two businesses together. But they haven't totally ruled it out: "It's something that we always look at," CEO Steve Mollenkopf told The Wall Street Journal in March. "Are we organized in a way that provides the greatest amount of shareholder value?"

Qualcomm Stock Revival Option No. 2: Counteroffer for Broadcom

Before the Avago-Broadcom deal, some industry analysts though Qualcomm should make a bid for Broadcom. And it's not too late for QCOM to make a counteroffer. Credit Lyonnais Securities Asia analyst Srini Pajjuri believes Qualcomm could offer as much as $65 a share, well above Avago's bid of $54.50. A Qualcomm-Broadcom pairing would offer economies of scale and bring on board Broadcom's leading infrastructure and networking business - all while foiling the plans of a rival. Still, the steep price tag makes it the least likely option.
Qualcomm Stock Revival Option No. 3: Join the Merger Parade
If Qualcomm elects to take the well-traveled path of acquisition, it has a lot of choices. A few that are making the rounds right now:

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  • Skyworks Solutions Inc. (Nasdaq: SWKS): With a market cap of about $20 billion, Skyworks would be more digestible than Broadcom but it's a company big enough to move the needle. Skyworks makes chips for mobile phones, but also specializes in chips used in the rapidly growing Internet of Things market.
  • Ambarella Inc. (Nasdaq: AMBA): Ambarella, with a $3 billion market cap, would be an easy acquisition for Qualcomm. AMBA stock has soared nearly 300% in the past 12 months. Investors like the company's role as a supplier to GoPro Inc. (Nasdaq: GPRO), but Ambarella has also built a reputation as a top chip-maker in wearable tech. So AMBA could give QCOM a completely new source of growth.
  • Advanced Micro Devices (Nasdaq: AMD): An acquisition that would help Qualcomm's datacenter aspirations would be to buy AMD, a bargain with a valuation of under $2 billion. But AMD is a veteran company with an established reputation in the enterprise. AMD's advanced ARM-based datacenter chip technology could jump-start Qualcomm's move into that business. What AMD doesn't have is Qualcomm's vast financial resources. This is a pairing that makes a lot of sense. But so does another...
  • Xilinx Inc. (Nasdaq: XLNX): This chip-maker is the only serious rival to Altera in the specialized area of Field Programmable Gate Arrays, or FPGAs. Intel wants FPGAs so it can more easily customize its datacenter offerings. Qualcomm could buy Xilinx to do the same and blunt Intel's advantage. The Xilinx market cap of about $12.3 billion makes it a "just-right" acquisition, putting it in the ballpark of the other big semiconductor deals.
The Bottom Line: With Qualcomm stock slumping, an activist investor breathing down its neck, and its industry transformed by consolidation, the company needs to do something - and soon. Qualcomm could split itself up or make a counteroffer for Broadcom. But the odds are QCOM will seek out a merger partner of its own, most likely AMD or Xilinx.

Keep an Eye on Xilinx: Qualcomm isn't the only company that would benefit from a merger with Xilinx and its FPGA technology. And with all the recent mergers, a bid for Xilinx could happen any day now.  Here are all the companies with good reasons to buy Xilinx...

Follow me on Twitter @DavidGZeiler.

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