The news about Qualcomm (NASDAQ:QCOM) has been little but gloom and doom lately, thanks to the sting of multiple court losses at the hands of Broadcom (NYSE:BRCM). With a long-term vision, though, the company reminded investors of its confidence in the future with an announcement of significant share repurchases totaling $1.1 billion in just the last two months.
CEO Paul Jacobs noted that the company is "pleased to have repurchased shares at what, we believe, is a significant discount to the long term intrinsic value of the Company's businesses." Of course, the intrinsic value of any business varies depending on assumptions made about the future, and it's no surprise that Qualcomm should be bullish about its own prospects. But while Qualcomm's stock hasn't nose-dived dramatically, it has remained stagnant for more than two years, despite the company's record profits and cash flow.
The myriad lawsuits and complaints coming at the company from the likes of Ericsson (NASDAQ:ERIC), Texas Instruments (NASDAQ:TXN), and, most recently, Nokia (NYSE:NOK) have kept a significant amount of risk priced into the stock. Running a discounted cash flow (DCF) analysis using its trailing-12-month free cash flow of $3 billion places Qualcomm's shares at about 26% less than intrinsic value. This calculation assumes an 11% discount rate, free cash flow growth of 17% over the next five years (a conservative figure, less than analysts' 19.4% EPS growth estimate over that time), a stepping down to 10% over the following five years, and 3% percent thereafter.
That estimation, however, does not factor in the risk of lost royalties from Nokia or the potential impact of other lawsuits. If investors attempt to quantify the lost royalties from Nokia, which Qualcomm has pegged at $0.05 per share in the next quarter alone, approximately $328 million will be subtracted from its cash flow. Yet even if you were to conservatively back out an even greater figure, say $500 million, Qualcomm's shares would still appear to be underpriced by roughly 12%.
The inference? At today's price, it appears that the market is factoring in not only a total loss of royalties from Nokia, but also a cut in revenue growth from other customers, because of either reduced chipset sales or lower royalties in the future. This is a very real risk, but one that represents the worst-case scenario Qualcomm is working ardently to mitigate. It's more likely that Qualcomm will find a way to resolve its legal issues and survive with more superficial, albeit painful, wounds, rather than subjecting the business to that level of destruction.
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Fool contributor Dave Mock believes Britney Spears' contribution to the betterment of society is undervalued by at least 50%. He owns shares of Qualcomm and is the author of The Qualcomm Equation. The Fool's disclosure policy will shake other disclosure policies like a rag doll, and not even feel bad about it.
