Shares of Qualcomm (QCOM -0.18%) dropped 10.8% in March due to tech stock weakness and concerns about its competitive strength. The company announced a large increase to its dividend, which is now up to a 2% yield. But that wasn't enough to overcome tough news coming out of an important trade show in the mobile device industry.
There wasn't much news about Qualcomm last month. The semiconductor stock struggled in early March along with the rest of the market. Investors were concerned that the conflict in Ukraine could lead to widespread geopolitical instability. While Qualcomm derives less than 1% of its revenue from Russia and Ukraine, it was dragged down along with other tech stocks.
Qualcomm might have also been hurt by a change in the competitive landscape. Rival smartphone chipmaker MediaTek made several large announcements at the Mobile World Congress, an annual trade show held in Spain. Both Qualcomm and MediaTek used the event to announce new products for the next generation of smartphones.
MediaTek is clearly making a move to steal Qualcomm's market share in medium and high-end devices. The Taiwanese chipmaker has already established itself as a competitor in budget phones, but this new announcement casts doubt on Qualcomm's dominance in a key area.
MediaTek went a step further, announcing that it had overtaken Qualcomm in market share for Android phones during the fourth quarter, based on a third-party market analysis. Qualcomm disputed the claim, citing another market research report. Regardless of who's correct, it's hard to deny the erosion of Qualcomm's leadership position.
Investors don't like any sign that an economic moat is disappearing. That's especially true during periods with low risk appetite in the market, like we're seeing now.
Semiconductor stocks can be tricky to evaluate. It's a competitive market with new generations of products launched every couple of years. If one generation underperforms, a company can lose lots of steam and quickly fall behind its rivals. That's exactly why investors reacted negatively to the news from MediaTek.
If the threats to Qualcomm's competitive position are genuine, then it's probably going to create a drag on cash flows in the future. The semiconductor companies will have to compete on some combination of price and quality. Price competition leads to lower sales and lower margins. Both companies will probably also have to invest heavily in product development and marketing, further cutting into profits. In the worst-case scenario, demand for Qualcomm's products will be reduced.
Qualcomm is a respected market leader in mobile device semiconductors. The company has indicated that it has major growth opportunities related to the Internet of Things, automotive, and laptop markets. The stock is currently the cheapest it's been in years, with a 12.6 forward price-to-earnings ratio and 12.4 enterprise value to EBITDA. If you think that Qualcomm can build on its strong market position and grow into new markets, then this might be a great price to jump in at.