What is the stock?

Qualcomm Inc (NASDAQ: QCOM).

Source: Bloomberg

How long have you held the stock?

12 months.

What do you like about it?

Qualcomm is one the world’s most important companies, with over 2 billion people around the world each day relying on its technology to make and receive phone calls, conduct commerce over mobile devices and enable the growing proliferation of connected devices.

The licensing business, which charges device manufacturers such as Samsung and Apple for the use of Qualcomm’s intellectual property (IP), is typically a very stable high-margin business that has grown with the number of devices that are shipped each year.

Qualcomm’s natural cash generation allows the company to pay a near 5% dividend on the investment today, a rarity for technology companies.

How is it better than its competitors?

Qualcomm invented many of the technologies that are at the heart of the communications revolution of the past 25 years, and remain dominant in the supply of intellectual property (IP) and chips that allow mobile communication systems to function.

Apple and Samsung continue to ship millions of devices each year, which rely heavily on Qualcomm IP.

Qualcomm has in recent years signed a wide range of agreements with numerous government agencies such as China’s NDRC, and customers such as Samsung, that essentially preserve its current licensing model.

What do you like about its management?

Qualcomm’s Technologies business, where they supply chips that power mobile devices, has been historically undermanaged. Margins in this segment are significantly below what we believe are achievable over the next three years as management finally get to work on optimising the margin structure. Essentially, this amounts to taking a much harder line on product range and opportunities for revenue and cost efficiencies.

Qualcomm’s ex board chairman and CEO has actively sought financing for a take-private bid for the company, indicating he too sees tremendous value in the business at these prices. It’s unclear that such a bid will materialise, but regardless, we see multiple ways to win over the next three years.

What is your target price?

We can realistically see Qualcomm heading above US$90.00 a share by 2020.

At what point would you sell it?

US$90.00

How much has it added (subtracted) to your overall portfolio over the last 12 months?

Qualcomm has detracted 0.47% from the Antipodes Global Fund over the last 12 months.

Where do you see the value?

Qualcomm should also take control of the world’s leading supplier of semiconductors to the automotive market (NXP Semiconductor) later this year, where we see tremendous synergies with its existing prowess in communications meeting the demand of the next generation of connected vehicles – an exciting combination that fits with several other Antipodes holdings in our next-generation communications cluster.

We are now seeing the initial ramp of 5G technologies where Qualcomm should naturally lead.

Qualcomm’s relationship with Apple has recently soured to the point where Apple began to withhold licensing payments to Qualcomm, whilst they argued its terms for payment were unfair. Ultimately, a commercial agreement is likely to be reached that would restart Apple’s payments and a onetime payment for those royalties withheld.

We ultimately believe the uncertainties that have weighed on the shares will be resolved by year end, at which point the market is likely to embrace Qualcomm’s true earning power and share price potential – a number we believe is much higher than today’s. 

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