Xiaomi Deal Could Send QCOM Stock Soaring
Qualcomm, Inc. (NASDAQ:QCOM) stock tanked big-time this year. In less than 12 months, Qualcomm’s stock price plunged more than 34.6%. Most recently, the company is facing antitrust charges from the EU.
However, it’s not the end of the world for owners of QCOM stock, as the company has just signed a deal with one of China’s largest smartphone makers, Xiaomi Inc.
Let’s look at the bad news first. On Tuesday, December 8, the European Commission, the EU’s top antitrust authority, said it had charged Qualcomm with abusing market power to drive its competitors out of the market.
In particular, QCOM was charged with paying a major customer to exclusively use its chips and selling chips at low prices to force a competitor Icera Inc. out of the market. (Source: “EU Accuses Qualcomm of Using Market Power to Hinder Rivals,” Reuters, December 8, 2015.)
Investors did not like the news: the announcement sent QCOM’s stock price down more than five percent on Tuesday. If the charges are confirmed, Qualcomm could face a fine equivalent to 10% of its 2014 worldwide revenue.
But let’s move on to the good stuff.
QCOM Stock: Licensing Deal With China’s Leading Smartphone Maker
As you may already know, Qualcomm’s products have been quite prevalent. For instance, in the “iPhone 6s,” you can find Qualcomm’s LTE chip, envelope tracking IC, power management IC, and radio frequency transceiver.
Now, it looks like you might find Qualcomm’s technology in one of the most popular smartphones in China, too.
On December 2, 2015, Qualcomm announced that it had entered into a patent license agreement with Chinese smartphone-maker Xiaomi Inc.
Under the terms of the agreement, Qualcomm has granted Xiaomi a royalty-based license to develop, manufacture, and sell 3G- (WCDMA and CDMA2000) and 4G-complete, including 3-mode (LTE-TDD, TD-SCDMA and GSM), devices. (Source: “Qualcomm and Xiaomi Sign 3G/4G License Agreement,” Qualcomm, Inc., December 2, 2015.)
Note that this is not the first time for Qualcomm to reach a deal with a Chinese company. Qualcomm has already made similar deals with China’s Huawei Technologies Co., TCL Communication Technology Holdings Ltd., and ZTE Corp.
Also note that its licensing deals represented quite an important part of the company’s revenue. In the fiscal year ended September 27, 2015, Qualcomm’s licensing revenue totaled $8.2 billion, representing more than 32% of the company’s total revenue. (Source: “FY15 4th Quarter Earnings Release,” Qualcomm, Inc., last accessed December 10, 2015.)
Mind you, Xiaomi is no small player in China’s smartphone market. According to research firm Canalys, Xiaomi had surpassed Apple Inc. (NASDAQ:AAPL) to become the top smartphone vendor in China, with an estimated market share of 15.9%. (Source: “Apple Loses Top Spot in Chinese Smartphone Market to Xiaomi,” CNET, last accessed December 10, 2015.)
Having a deal with a leading player like Xiaomi will likely give Qualcomm’s revenue a serious boost.
In the short term, ongoing investigations into Qualcomm’s antitrust charges will likely bring uncertainty to its financials and investors won’t like that.
On the flip side, the company’s licensing deals with China’s smartphone vendors will likely bring decent revenue to Qualcomm. Plus, let’s be honest: with a price-to-earnings (P/E) multiple of just over 15, QCOM stock looks like a bargain when the industry’s average P/E is 25.28.
For investors looking for value in this market, QCOM stock is definitely worth looking at.