The news about Qualcomm
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
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.