Shares of chip manufacturer QUALCOMM (NASDAQ:QCOM) have had a rough year. The stock is down approximately 16% year to date as the company struggles with a number of challenges.
Qualcomm definitely has its fair share of headwinds. It's having significant trouble collecting licensing royalties in China, and has publicly stated its belief that certain vendors are underreporting device sales in that region.
While Qualcomm's woes are a concern, there's nothing to me that indicates the company is threatened by a long-term deterioration. Qualcomm still generates a ton of free cash flow, has an excellent balance sheet, and thanks to the market's panic selling, the stock is very attractively valued. If anything, Foolish investors with a long-term vision should take this opportunity to buy this great company at an even better price.
Bumps in the road
Qualcomm's situation is troubling in some respects, but the problems facing the company seem entirely manageable and short term in nature. On the Qualcomm Technology Licensing issue, the tech giant said last quarter it settled with a "large licensee" in China, which should boost the QTL business going forward.
Separately, investors appear concerned that Qualcomm lost out on the Galaxy S6 and Note from Samsung, and the ensuing loss of share. Collectively, these issues are why Qualcomm's operating profit declined 2% through the first two quarters of the fiscal year, and why the company expects current quarter revenue to decline 14% at the midpoint of its guidance.
But while investors may be concerned that Qualcomm reduced its outlook, Qualcomm's long-term future remains bright. Management still expects 10% growth in the value of total device sales this year. This is a key number for Qualcomm, because the royalties it receives are based on the value of device sales. This makes Qualcomm's technology-licensing business an excellent cash-flow generator.
With regard to losing Samsung, remember that Qualcomm operates a diversified business. It's not overly reliant on one device maker. While losing Samsung will hurt, it's far from a death blow. Qualcomm will still benefit from the continued growth in the smartphone industry as a whole.
For instance, Qualcomm's MSM shipments soared 24% last quarter, to 233 million units. That explains why the company still expects a fairly decent year, as the mobile station modem business is an important part of Qualcomm's smartphone presence. To me, this indicates underlying demand for Qualcomm's products, and the smartphone industry more broadly, remains strong.
It may take some time for Qualcomm to right everything that's going wrong right now. But the various challenges facing Qualcomm can be overcome. If nothing else, the market's punishment of the stock has presented an attractive buying opportunity for long-term investors.
Valuation, cash returns look very appealing
Shares of Qualcomm exchange hands for 14 times trailing earnings and 12 times forward EPS estimates. When you exclude the mountain of cash that Qualcomm has on the balance sheet, the valuation profile is even more compelling. Qualcomm currently holds $29 billion in cash and investments on the balance sheet with almost no long-term debt to worry about.
Considering Qualcomm's 1.6 billion shares outstanding at the end of last quarter, that comes out to a little more than $18 per share in cash. Excluding this, Qualcomm stock trades for just 10 times trailing earnings. Moreover, Qualcomm generates a lot of cash, and is committed to returning a boatload of that cash to shareholders. It pays a hefty 3% dividend yield, and as you can see, Qualcomm's P/E is near a five-year low, while its dividend yield is at a five-year high.
Qualcomm raked in $7.7 billion of free cash flow last year,and has announced a huge round of share buybacks, which should help boost earnings growth going forward. It plans to buy back $15 billion of its own stock, which would amount to about 15% of its current market capitalization. This includes $10 billion it expects to repurchase by March of next year.
As a result, I believe investors should view Qualcomm's poor stock-price performance this year as nothing more than an excellent buying opportunity.