Qualcomm: A Strong Buy For 2016

| About: Qualcomm Inc. (QCOM)


Qualcomm has already lost 45% from its 10-year peak value, reducing investment risk significantly.

2016 may see Qualcomm give at least 33% returns.

The market will realize its folly in the next earnings call on Jan 27.

Qualcomm (NASDAQ:QCOM) has been trading with a bearish bias since July 2014 due to numerous reasons. The stock has lost 45% after hitting a 10-year peak level of $82 in 2014, and is currently trading at $45.82.

The selling pressure has further intensified with the accelerating global market sell-off. But it has brought some stocks such as Qualcomm to reasonably safer levels. With both fundamental and technical factors turning positive for the company, it may be time that market participants start putting their dollars to good use.

Let us review the latest developments which may help revive the tech behemoth's fortunes.

Samsung (SSNLF) Returns to Qualcomm - After turning away from Qualcomm's 810 processor due to an overheating issue, Samsung is joining hands with the company for mass production of Snapdragon 820.

Rumors are rife that the South Korean Company will officially announce the release of its highly anticipated Galaxy S7, S7 Edge and S7 Edge+ at MWC in February. With Samsung now getting chip manufacturing orders from Qualcomm for its foundry business, Qualcomm also may have bargained to see its 820 processor chips in at least some versions of high-end S7 phones. Revenue from the smartphone company which has a 21.7% share in the global smartphone market will upscale the per share earnings of Qualcomm. The company had reported an 18.50% decline in quarterly revenue growth (YoY) and a huge 43.90% slump in quarterly earnings growth (YoY).

With the backing of the mobile giant, many companies which earlier shied from using Qualcomm processors might also change their minds.

The market is seriously undermining the positive impact that the Samsung-Qualcomm deal can have on the latter's revenues. The turnaround may take some time but it's now the stock can be bought cheap. If the tech sector sell-off intensifies, especially after Intel (NASDAQ: INTC) tanked on Friday even on robust results, the stock may not be spared. But that would only make a great stock very cheap, and therefore, very safe.

Dividend Yield Gets Very Attractive - The dividend yield has reached the highest level in the history of Qualcomm, which is great news for investors.

Click to enlargeWith the dividend yield hovering above 4% and the price languishing near five-year lows, investors should add this stock to their short-term as well as long-term portfolios.

Qualcomm Is Serious About Buying Your Shares - The company reaffirmed its stance on the share repurchase program, issuing roughly $10bn in unsecured floating- and fixed-rate notes to buy back shares from the market in order to improve the earnings per share and partially offset the shares issued under employee benefit plans.

According to the company's Annual Report 2015, the number of outstanding shares declined by 9% to 1.52 billion as of September 27, 2015, from a year ago due to the share buyback. The share buyback program is a vote of confidence from management that the stock is undervalued in the market.

Concerns about the company taking on debt to return capital to shareholders can be alleviated by taking a look at the debt structure, taken from the Annual Report 2015, below:

Click to enlarge

The company has nothing to pay to its creditors until May 18, 2018, and the term extends until 2045.

Technically, A Screaming Buy - After taking comfort from the fundamental status of the company, I also wish to present the technical factors which say that Qualcomm may have found its bottom at the current level, unless market crashes significantly from here.

Click to enlarge


From the monthly price chart spanning the period from 1999 to date, it can be seen that the stock has repeatedly taken support from a trendline. The 15-year trendline (very strong support) stretches to cushion the fall in Qualcomm now. Investors have repeatedly seen the testing of this support line as a "buy" level, and benefited from huge rebounds.

From a conservative point of view, I expect the stock to retrace to at least $60 in the next 12 months. This means roughly 33% upside in one year. Not bad, right?

Apart from the price action, there is another indicator which calls for a buy on the stock. If you draw a support line on the Money Flow Index from 2004, the current value of 14-month MFI of 34.8062 coincides with the floor. The 12-year trendline will be very hard to pierce, in my opinion.

Conclusion - Buy Qualcomm now

Qualcomm Inc. is an attractive investment opportunity at the current level, considering both technical and fundamental aspects.

The company is also taking an aggressive stance against competitors. The company entered into a joint venture with the Government of China's Guizhou province to claim a bigger stake in the data center market. Qualcomm intends to design and sell server chips in China in order to compete with the largest chip maker in the world, Intel.

Anand Chandrasekhar, Senior Vice President and General Manager, Qualcomm Data Center Group, told Forbes that a production-level server chip can be reasonably expected in the next six months.

I believe that the market will realize the true potential of the aforementioned measures soon and the stock will begin an uptrend.

Investors also can choose to invest a small portion of their funds now and add on if the stock becomes more attractive. This way they benefit from a price rise or by buying more stake in a valuable company.

Qualcomm is one stock that will stand out in the next 12 months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.