Qualcomm (NASDAQ:QCOM) is on the move. Analysts believe Qualcomm’s performance for 2016 will drop about 8%, after the previous year’s drop of almost 5%. For all intents and purposes, Qualcomm appeared to have forsaken strategic growth in favor of cost cutting during 2015 and 2016. The company’s reliance on smartphones, a market which faltered, did not look auspicious.
But the situation changed in a New York minute. In October, Qualcomm announced it was buying NXP Semiconductors (NASDAQ:NXPI). NXP’s manufacturing prowess will allow Qualcomm to reduce its reliance upon smartphones and push into the burgeoning Internet of Things, which is ready to explode. NXP’s profit margin sits at 25% and NXP’s secure connection chips will allow for growth and development in markets that don’t even exist right now.
The immediate ramification of the NXP acquisition is it immediately positions Qualcomm as a major player in automotive chips. Adding fuel to the fire is analysts’ predictions that connected devices will double by 2020.
Once the NXP acquisition is finalized, a report by the Wall Street Journal indicates that the move could increase Qualcomm’s profitability by 30%. Moreover, the price-to-earnings ratio for Qualcomm is much better than other similar companies. Qualcomm’s P/E sits at 17.
Qualcomm’s dividends have performed consistently each quarter for the last four fiscal years, while NXP’s revenue for 2015 was $6.1 billion. That number is expected to hit $9.48 billion for 2016. And over the last three years, NXP’s growth has averaged 11%. NXP’s earnings per share of $5.60 in 2015 indicated an increase of 18% over the prior year.
Even without the acquisition of NXP, Qualcomm would be a great investment. Despite the drop-off in smartphone growth, Qualcomm is deploying its tech virtuosity into the virtual reality realm and wireless 5G. In September, Qualcomm introduced its Snapdragon VR820 platform, intended to allow developers to generate the software, hardware and content necessary to capture the VR market. If that was not enough, Qualcomm launched its new 5G modem in the middle of October. Called Snapdragon X50, it is the first 5G modem on the market.
By acquiring NXP, which last year acquired Freescale, Qualcomm has, in one fell swoop, established itself to become a major supplier of chips for cars, trucks, entertainment and industrial uses.
In the case of Qualcomm, investors should forget about market timing and get in now. The NXP acquisition should take place in the next few months. When it does, investors can expect to see the share price escalate rapidly. The price is already on the rise, sitting at $67 as of November 18. On August 18, three months prior, the price was $63. Investors can also expect to see revenue increase, not only because of the NXP potential, but because of Qualcomm’s innovations in VR and 5G.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
