Shares of Qualcomm (QCOM 2.23%) slid 5% on March 13, after President Trump blocked Broadcom's (AVGO 0.67%) attempted takeover of the chipmaker on national security concerns.
Prior to that decision, Broadcom arguably had Qualcomm on the ropes. But as Broadcom walks away, there are reasons to doubt Qualcomm can pick itself back up.
The story thus far...
Broadcom initially tried to buy Qualcomm for $70 per share last November. Qualcomm rejected the bid, and Broadcom raised its offer to $82 in early February. Broadcom also put six nominees up for election to Qualcomm's 11-member board, with the results to be announced during Qualcomm's shareholder meeting on March 6.
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Qualcomm then boosted its bid for NXP Semiconductors (NXPI 2.27%) from $110 to $127.50 per share to close the long-delayed deal and shore up its defenses against Broadcom. Broadcom responded by lowering its bid to $79 per share, claiming that the NXP bid reduced Qualcomm's value.
The preliminary results of the board vote indicated that Broadcom would win all six seats. So in a desperate 11th-hour move, Qualcomm requested that the U.S. Committee on Foreign Investment (CFIUS) investigate the merger. CFIUS ordered Qualcomm to postpone its meeting to early April.
Broadcom then accelerated its attempt to redomicile from Singapore to the United States, which would prevent CFIUS from blocking the deal. Before that happened, CFIUS recommended against the merger, and President Trump killed the deal with an executive order.
Qualcomm may have escaped Broadcom's hostile takeover, but the stock could now be headed much lower since the only thing propping up its stock was the buyout buzz.
Why Qualcomm is in big trouble
Qualcomm was stuck in the low $50s before Broadcom's offer catapulted the stock to the high $60s. The chipmaker had fallen out of favor due to a seemingly endless series of probes, fines, and lawsuits across the world.
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Most of those actions targeted its high-margin licensing business, which generates the lion's share of its profits by leveraging its wireless patent portfolio to collect licensing fees.
Many regulators and OEMs claimed that Qualcomm's cut -- up to 5% of the wholesale price of smartphone -- was too high. Some regulators also believe that Qualcomm's now-expired deal with Apple (AAPL 3.40%), in which it paid the iPhone maker "rebates" for the exclusive right to make its modems, was anticompetitive.
Qualcomm already agreed to pay fines in China and Taiwan, and it's currently disputing its fines in South Korea and Europe. Meanwhile, Apple is suing Qualcomm over its licensing fees and unpaid rebates and has halted all licensing payments to Qualcomm. That defiance encouraged another major original equipment manufacturer (OEM) -- widely believed to be Huawei -- to also suspend its payments.
Apple is also reportedly designing new iPhones and iPads that would completely replace Qualcomm's baseband modems. That move would hurt Qualcomm's chipmaking business, which already faces tough competition from first-party chipsets from OEMs like Huawei and cheaper rivals like MediaTek.
Qualcomm tried to solve these problems by buying NXP, the world's largest automotive chipmaker. That move would diversify its business away from mobile devices and deepen its patent portfolio. Unfortunately, the Broadcom saga forced Qualcomm to prematurely raise its bid for NXP -- which boosts the total value of the deal from $38 billion to $44 billion.
Qualcomm's expectations vs. reality
In late January, Qualcomm pledged to grow its fiscal 2019 sales by about 60% and more than double its earnings per share if its investors blocked Broadcom's bid. Qualcomm claimed it could achieve this by settling with Apple, implementing a $1 billion cost reduction plan, and closing the NXP deal.
However, Qualcomm was fined by the EU, agreed to pay its fine in Taiwan, and raised its bid for NXP after it made that promise. Those factors could make it much tougher for Qualcomm to hit its lofty targets. There's also no guarantee that Apple will simply back down.
Analysts expect Qualcomm's revenue and earnings (excluding the potential impact of NXP) to fall 4% and 21%, respectively, this year. For 2019, they anticipate 3% sales growth and 11% earnings growth.
Wall Street expects NXP to generate $10.4 billion in revenue in 2019. When we add that to the $22.8 billion in revenue Qualcomm is expected to generate that year, we get a 50% boost -- not a 60% one.
The valuations vs. reality
At $60 per share, Qualcomm is valued at 18 times its estimated earnings for 2018, which is a high multiple for a company with declining earnings. By comparison, Intel -- which is actually expected to grow its earnings this year -- trades at 15 times forward earnings.
At $50 per share, Qualcomm would trade at 15 times forward earnings, which is a more reasonable P/E ratio in light of all of its troubles. Unfortunately, this implies that the stock has a lot of room to fall before it can be considered a bargain.
