A Timely Purchase for QCOM Stock
Earlier this month, QUALCOMM, Inc. (NASDAQ:QCOM) reported better-than-expected fourth-quarter earnings, citing strong growth in its China division. Yet, for some reason, QCOM stock was relatively subdued in the weeks that followed.
The frosty reception is probably due to lingering skepticism about the company’s giant $38.0-billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI), a deal which Qualcomm deems necessary.
While I understand the arguments against the deal ($38.0 billion is a lot of money!), the merger still makes sense to me because Qualcomm needs to think about the future.
After all, it makes its bread and butter off of chips for smartphones, an industry which is almost mature. Think about it: nearly everyone who can afford a smartphone has one, and smartphones aren’t getting much better with each upgrade.
If Qualcomm doesn’t expand into new growth opportunities, it risks getting left behind. From that perspective, I can completely understand why it would need to make this deal. NXP is a microchip maker as well, but its products are specific to emerging technologies like driverless cars.
The sensors which power self-driving technology and the Internet of Things (IoT) are developed in part by NXP, meaning Qualcomm is placing a bold bet on the future. The company is cruising down the runway with NXP as its wings and the hope that enough acceleration in emerging technologies can lift Qualcomm stock’s share price sky-high.
What’s amazing is that these moves to expand Qualcomm’s product portfolio are already paying dividends. Just look at the recent earnings report.
Revenues rose 12.7% to $6.2 billion from $5.5 billion a year before, showing that sales were on an upward track. Earnings growth was similarly upbeat with $1.07 per share as opposed to $0.67 in the fourth quarter of 2015. (Source: “Qualcomm Tops Estimates on Strong Shipments and New Licences,” The Wall Street Journal, November 2, 2016.)
On top of those results, the company delivered 211 million microchips in the last three months, outpacing the 206 million that analysts predicted. Much of the growth came from new patent licensing deals in China, which was a savvy inroad the company crafted this year.
QCOM stock is already up nearly 40% from the same time last year, but I think those gains are the tip of the iceberg. Investors haven’t yet appreciated the genius of acquiring NXP, but they probably will as emerging technologies hit their tipping point. Any surge in driverless tech or IoT is going to give QCOM stock an adrenaline shot, and it’s all thanks to this timely purchase of NXP.