The big news from last week was that Qualcomm (NASDAQ:QCOM) has likely finally lost modem sales for the iPhone. The news ends months of speculation that Intel (NASDAQ:INTC) would eventually obtain a secondary supply option for 4G baseband modems in the iPhone 7.
The stock has lost some shine from the recent rally off the lows. The data continues to suggest that investors should look at other factors to derive whether to own the stock going forward including the constantly high yields.
A bigger issue with Qualcomm is the slowing market for smartphones versus whether the company losses modem business with Apple (NASDAQ:AAPL). In fact, some reclaimed business from rival Samsung (OTC:SSNLF) and other Snapdragon customers might be a big offset.
According to news from Bloomberg, the next iPhone will use Intel for the 4G baseband modem on AT&T's (NYSE:T) network. Qualcomm will maintain business with Verizon Communications (NYSE:VZ) and those sold in China.
The interesting part of the story is that Apple sold 231 million iPhones in FY15 with Verizon and AT&T accounting for only around 20% of the total. China is another huge chunk, but the Bloomberg report doesn't really address the full spectrum of sales.
Analysts such as CLSA estimate that Intel could get up to 30% or 40% of the modems business from Apple. The reason it doesn't matter to a large extent is that my previous research highlighted Barclays' work on the limited financial impact. Now if Qualcomm does lose 40% of the business, the impact would become meaningful at up to a $0.26 EPS hit.
For investors though, the CEO commented on the FQ2 earnings call that this move was already expected and built into the guidance.
It is important to note that for planning purposes, both our near-term and long-term margin targets have consistently factored in a range of second sourcing assumptions at our large customers, and we believe our margin targets are achievable under those scenarios.
While losing business with Apple, the company is likely gaining back business with Samsung. The new Snapdragon 820 processor is expected to regain business lost when the previous processor didn't perform up to expectations.
Fellow contributor Motek Moyen provided a thorough summary of the progress made by the Snapdragon 820 to regain business.
While the chip business shifts back and forth, the stock is extremely cheap unless one sees a structurally challenged company. Based on the above data and new IoT and wearable catalysts, Qualcomm has a solid future.
The company continues using the substantial balance sheet that ended the last quarter with $30.0 billion in cash and marketable securities to provide yield protection. In FQ2, Qualcomm bought 31.7 million shares for $1.5 billion. On top of that, the company increased the dividend by 10% to $0.53.
The new dividend yield is 4.0% and the below chart highlights the outstanding yields of the company. The net payout yield (net stock buyback yield plus dividend yield) sits an astounding 17.4%.
Based on the current net payout yield, Qualcomm sits as the fifth largest in the market.
Note the dividend yield above is the trailing yield that doesn't include the recent 10% bump, but the chart shows how the yield has consistently risen this last year to provide yield protection.
While the business has a lot of give and takes that create volatility in the current smartphone market, the stock is undeniably cheap in the low $50s. Investors should continue using dips including any related to losing part of the iPhone business as a buying opportunity.
Disclosure: I am/we are long QCOM, AAPL.
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