In its latest attempt to fend off a hostile takeover by Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM) pledged to deliver huge revenue and earnings growth in fiscal 2019 if shareholders blocked the bid.
In a presentation to shareholders, Qualcomm declared that it could generate $35-$37 billion in revenues that year, compared to the consensus estimate of $23.5 billion. On the bottom line, it pledged to deliver earnings of $6.75-$7.50 per share, compared to the analyst estimate of $3.82.
The midpoint of those forecasts implies that following a 2% sales decline and a 17% earnings drop this year, Qualcomm believes that it can respectively grow its revenue and earnings by 57% and 101% in fiscal 2019. If Qualcomm can hit that target, the stock would be trading at less than ten times its 2019 earnings estimate.
That lofty promise raised a lot of eyebrows, since Qualcomm is currently crippled by ongoing litigation from OEMs and regulators across the world. Can Qualcomm actually hit those targets? Or is it merely buying time to counter Broadcom?
What Qualcomm thinks will happen
The bulk of Qualcomm's revenue gains would come from closing its acquisition of NXP Semiconductors (NASDAQ:NXPI), which was initially announced in Oct. 2016. Closing that deal, which would make Qualcomm the biggest automotive chipmaker in the world, would create a company that generates "more than $30 billion" in annual revenues.
Qualcomm also plans to resolve its ongoing legal disputes with Apple (NASDAQ:AAPL), which erupted last year in the US and China over unpaid exclusivity rebates and the chipmaker's patent licensing practices. At the time, Apple instructed its suppliers to halt all licensing payments to Qualcomm, and is reportedly exploring ways to drop Qualcomm's modems from its iPhones and iPads.
Untangling that mess would be tough, but if Apple's suppliers start paying licensing fees again, Qualcomm could recover a few hundred million dollars per quarter -- and even more in back payments. Therefore, hitting $35-$37 billion in annual revenues in 2018 is possible, but it's also a rosy best-case scenario.
As for its earnings, Qualcomm plans to implement a $1 billion cost reduction plan. That amount would certainly do the trick, since Qualcomm generated just $2.5 billion in net income in fiscal 2017. If the NXP deal fails to close, the company plans to execute a "large" buyback to hit that earnings target. However, losing NXP would also make it practically impossible for Qualcomm to hit its revenue target for 2019.
Why I think Qualcomm can't keep its promise
Unfortunately, Qualcomm's assumptions ignore some serious issues that would prevent it from hitting its sales and earnings targets.
First, Qualcomm's planned takeover of NXP was recently cleared by EU regulators, but only after it agreed to part with NXP's standard essential NFC (near-field communications) patents. However, the vast majority of NXP's shareholders haven't tendered their shares, and activist investor Elliot Management still adamantly opposes the deal -- unless Qualcomm hikes its offer from $110 to $135 per share.
Second, Qualcomm can't assume that Apple will just back off. Instead, Apple is actually sparking an industrywide revolt against Qualcomm's licensing fees, with Huawei also reportedly halting its licensing payments. If other OEMs follow suit, Apple would gain the upper hand against Qualcomm in any new licensing negotiations. The damage done to Qualcomm's licensing business -- which generates the lion's share of its pre-tax profits -- would also be tough to offset with cost-cutting measures or buybacks.
The road ahead
I think Qualcomm will fend off Broadcom, since Broadcom's initial offer of $70 per share (which values Qualcomm at just 20 times its estimated 2017 earnings) seems low for the world's biggest mobile chipmaker and patent holder of wireless patents. The deal could also be blocked by the FTC, which recently launched a probe into Broadcom's takeover attempt.
However, I don't think Qualcomm can hit its lofty revenue and earnings targets. Assuming that it can close the NXP deal, Apple drops its lawsuits, and other OEMs all fall into line is far too optimistic.