The recent market bounce off the bottom has investors rethinking positions in most stocks including Qualcomm (NASDAQ:QCOM). The wireless technology giant faces pressure from new competition in the modem sector while trading at a huge value discount considering the cash position.
The story is very much about looking in the right direction. On one side, Qualcomm is up strongly off the recent bottom at $42 and faces losing business from Apple (NASDAQ:AAPL). On the other side, the stock is down sharply from the highs around $77.50 and has new market opportunities to expand the addressable market. What direction will drive the stock?
The Intel Threat
The semiconductor market has long faced the investment dilemma of having multiple sources for supplies vs. settling on lower quality for the second supply choice. In the case of baseband modems for smartphones, Qualcomm has long been the dominant player. Now Intel (NASDAQ:INTC) is making a push to steal away business with signs that Apple plans to use them possibly in the iPhone 7 as a second source.
The news even has Barclays throwing in the towel (via Barrons) on Qualcomm. The odd part of the research regarding the potential lost share to Intel is that the overall impact is rather small to specifically Intel. One has to wonder what the long-term push in this sector is with only a $0.02 EPS boost from a 20% market share gain for a customer like Apple.
Considering even an analyst with a negative opinion on Qualcomm now only sees a roughly $0.10 hit from an expected market share loss of 10-15%, the market is clearly over thinking the Apple story. Remember that despite Apple being the largest phone company in the world, the phone volumes are actually small on a global basis.
Addressable Market Growth
While a lot of focus this month is on the potential loss of modem share at Apple, the market isn't looking at the complete picture with Qualcomm. The company is aggressively moving into data centers, IoT, virtual reality, and even drones.
The company estimates that the total addressable opportunity for the QCT business will grow to over $100 billion from the $23 billion for the core mobile market in 2015. A big part of the growing opportunities come from the joint venture with TDK Corporation to address the RF front-end opportunity and IoT that total at least $15 billion each by 2020.
Source: Qualcomm Annual Shareholders Meeting presentation
Those investors focused too much on the Apple/Intel story are missing the forest for the trees. While the company may lose some baseband modem business with Apple, signs exist that Qualcomm will gain business back from Samsung (OTC:SSNLF) in the S7/S7 Edge products recently announced.
While the investment in Qualcomm is a balancing act right now with the potential to gain share back from Samsung while losing it at Apple, the wireless technology giant is positioned to grow in new categories. In the meantime, investors get a 4.2% dividend yield and net cash of nearly $20 billion. With an enterprise value of only $37.50 per share, the stock trades at roughly 8x FY17 EPS estimates.
At $50, the downside risk is limited with plenty of catalysts on the upside. Investors should use any dip in the stock as an opportunity to build a position or add to existing positions.
Disclosure: I am/we are long QCOM, AAPL.
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