Qualcomm and EMC: Investment Lessons Learned The Hard Way

Includes: DVMT, QCOM
by: Investopedia Advisor

Investopedia Advisor submits: Remember the kid they used to stick out in left field? You know, the one who circled under the ball yelling, “I got it! I got it!” and then, “Ooops, I don’t got it.” When it comes to my calls on tech stocks Qualcomm (NASDAQ:QCOM) and EMC (EMC), I am that kid.

Back in May I reckoned Qualcomm shares – despite being steeply priced at $52.56 – still had further to go. Today the shares are trading roughly 30% lower, and I now find myself sympathizing with investors running for the hills.

Where did I drop the ball? Just 50 trading days ago, I assumed Qualcomm’s wildly profitable technology royalty fees – which account for more than two thirds of its earnings – were as good as guaranteed. Boy oh boy, was I mistaken. I failed to fully consider the dangers facing Qualcomm’s licensing business.

Consider these developments. Qualcomm’s biggest customer, Nokia (NYSE:NOK), is pushing harder for a deal that will slash royalty payments. Blaming those expensive licensing fees, the Finnish handset giant says it will quit plug production of CDMA phones. A whole slew of wireless telecom operators are mulling the option of switching from CDMA to GSM technology due to issues related to royalty payments. All this creates a cloud of uncertainty about the scale of the CDMA market and Qualcomm’s future earnings.

Meanwhile, Nokia, together with Texas Instruments (NYSE:TXN), Broadcom (BRCM), Ericsson (ERICY) and a host of other big players, continues to lodge complaints with the European Commission against Qualcomm’s patent and royalty practices. An unfavorable decision would hit Qualcomm’s earnings hard.

Of course, Qualcomm is still growing, with billions in the bank, and it’s still the leader in a high growth industry. But don’t let that lull you – as it did me – into thinking that’s enough to guarantee share price upside. Qualcomm has big risks that you can’t afford to miss.

EMC is another stock I flubbed. In June I wrote about the data storage company’s untapped value at $12.00. With the stock now trading at $10.10, I am feeling a tad dumb. Mind you, the shares are down for reasons that would have been pretty tough for anybody to foresee.

For starters, who would have dreamed that EMC would pay so much for its latest acquisition, RSA Data Security (RSAS)? The $2.1 billion all-cash price tag represents a staggering 65% premium, equating to whopping multiple of 9 times sales. I am left perplexed about EMC’s ROI on this acquisition. No wonder EMC stock is under pressure.

Then there is EMC management’s failure to deliver on its promises. Like a lot of investors, I was expecting the company to meet bullish guidance set last quarter. But just weeks after telling investors everything was peachy, management warned that Q2 sales and earnings would land well below its own estimates, giving investors yet another good reason to flee the stock.

I still think EMC’s share price is seriously lagging behind its share value. The stock sells for just 2 times its net asset value – a ludicrously low price for market-leading tech player. But given the company’s misallocation of cash and its botched earnings guidance, I wouldn’t hold my breath for EMC’s valuation gap to close anytime soon.

But, then again, I might be off-the-ball (yet again).

By Ben McClure, Contributor - Investopedia Advisor

Ben McClure is director of McClure & Co., an independent research consultancy. Before founding McClure & Co., Ben was a highly-rated European equities analyst at city of London-based Old Mutual Securities. He also spent several years as a business/technology journalist at the Economist Group. Mr. McClure graduated from the University of Alberta School of Business with an MBA.

At the time of release Ben McClure owned no shares in any of the companies mentioned in this article.