QCOM Stock: 3 Reasons to Like QUALCOMM, Inc.

QCOM StockMobile chipmaker giant QUALCOMM, Inc. (NASDAQ:QCOM) stock was down about 30% in 2015. In the third quarter, QCOM stock’s revenue plunged 25% due to declining market share, competitive pressure from lower-end rivals, and Samsung Electronics Co Ltd’s (KRX:005930) decision to forego the chipmaker’s “Snapdragon” processor in favor of its own for its flagship phone.

However, Qualcomm stock recently got some much-needed good news. On February 22, 2016, the company announced that its chip will be back in the latest version of Samsung’s flagship “Galaxy” phone, the “Galaxy S7,” which will be released March 11, 2016. QCOM stock is up about 20% on the news, though it’s still well off its highs.

With the stock still down but the future looking a bit brighter, investors might want to take a closer look at QCOM stock. Here’s why.

Licensing Business

Qualcomm’s patent licensing business earns about three to five percent off the wholesale price of 3G and 4G phones. (Source: “Why Did Qualcomm Even Consider a Split,” Market Realist, December 17, 2015.) This revenue segment generated about a third of total revenue, but it makes up about 69% of the company’s operating income. (Source: “Qualcomm’s 1Q16 Earnings Slide: Slow Smartphone Sales to Blame,” Market Realist, January 29, 2016.)

However, over the years, some mobile phone makers, particularly those in China, have been underreporting device sales, which has affected Qualcomm’s royalty revenue.

In response, Qualcomm has been signing new long-term patent licensing agreements. In the first quarter of 2016, Qualcomm signed licensing deals with top Chinese mobile phone companies Xiaomi, Huawei Technology Co Ltd (SHE:002502), ZTE Corporation (SHE:000063), and Haier. Under the revised deals, Qualcomm will charge a five-percent royalty on 65% of the selling price of each phone. (Source: Ibid.) These deals should give Qualcomm’s licensing business a significant boost.

Dividends

Since QCOM stock has been hammered over the last year, the company’s dividend yield has steadily increased. QCOM stock is currently yielding an attractive 3.72% dividend.

Qualcomm has also raised its dividend for the past 12 years. In the past five years, the company has raised dividends from $0.17 to the current $0.48 a share. Based on its dividend payout ratio of 61%, QCOM stock’s dividend should continue to grow.

QCOM Stock Is Cheap

At today’s stock price, Qualcomm stock is trading at 11 times the company’s forward earnings. That’s a huge discount for a company that is still growing in the communications equipment industry and has a price-to-earnings ratio of 22.5. (Source: “3 Reasons To Buy QCOM Stock,” InvestorPlace.com, November 10, 2015.)

This also suggests that there could be limited downside left in the stock, as the sell-off over the past year might be overdone.

The Bottom Line on QCOM Stock

QCOM stock might have had a rough 2015, but 2016 should be better. With a turnaround in its licensing business, high dividend yield, and cheap valuation, Qualcomm is a stock you can’t ignore.

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