The QCOM Thread

[Otter]

At fenders' request, a thread presenting my investment thesis for QCOM. Tech sector makes up a fairly small percentage of my overall dividend income stream (roughly 4.5%). Accordingly, I am looking to increase my income derived from that sector (wouldn't mind up to 7.5% eventually). One of the few tech dividend growth stocks that I think represents a fair or better value at the moment is QCOM:

First, just the stats. Current P/E ratio (using FAST Graphs' blended formula, which is not TTM) at 14.2, or roughly 4% below its 10-year average P/E. A- credit rating. Current yield of 4.7%. 16 years of consecutive dividend growth. 5-year annualized dividend growth rate of 13.3%. Chowder number of 18. It is currently trading at a price roughly equivalent to 2016 and 2011 lows. Analyst growth estimates (for whatever those are worth), indicate substantial earnings growth in the next several years.

Yes, there are short-term headwinds from AAPL litigation. A long-winded overview of the wide-ranging litigation can be found here: https://www.digitaltrends.com/business/a...comm-news/  

Frankly, having dealt extensively with commercial litigation, this all looks like posturing in advance of a negotiated business solution. I may be wrong on that, but I suspect that Apple knows, like just about everyone else, that QCOM's modem technology is superior to competitors', such as Intel (there's a reason Apple used them for so long). QCOM's new 5G chipsets will likely lead the industry in the near-term, and serve as a powerful driver of QCOM profits, regardless of whether Apple uses them: https://www.theverge.com/circuitbreaker/...modem-2020

I suspect that Apple wants to negotiate a better long-term deal with QCOM and is using the litigation as leverage. Again, I could be wrong on that. Perhaps Apple feels that arguing about patents on chipsets that are about to be obsolete is a critical business move, or that it can destroy QCOM entirely and not have to worry about competitors using their superior modems, or it could be some other motivation entirely, but I think those motivations/outcomes are far less likely.

[fenders53]

Thanks Otter. That was some quick service. I don't understand these stocks from a technical standpoint, but I do have a view on litigation. The majors are litigation targets, and always will be. Just keep fighting until it doesn't matter. We are such a litigious country. Settle a suit and 5 more will replace it. In no way am I stating QCOM hasn't been wronged. At this point it would seem to be productive to reach an agreement.

My first memory of QCOM was the tech bubble, so late 90s. Analysts were predicting QCOM would be $1000 in five years. It did make a very strong run the next few years.

I will read your articles and consider an entry position.

[Otter]

(02-28-2019, 10:49 AM)fenders53 Wrote: Thanks Otter.  That was some quick service.    I don't understand these stocks from a technical standpoint, but I do have a view on litigation.  The majors are litigation targets, and always will be.  Just keep fighting until it doesn't matter.  We are such a litigious country.  Settle a suit and 5 more will replace it.  In no way am I stating QCOM hasn't been wronged.   At this point it would seem to be productive to reach an agreement.

My first memory of QCOM was the tech bubble, so late 90s.  Analysts were predicting QCOM would be $1000 in five years.  It did make a very strong run the next few years.    

I will read your articles and consider an entry position.

Major companies use their in-house and outside legal teams both defensively and offensively. The legal department and outside counsel are just additional tools in the overall business plan. Typically they are just that--tools--and not driving the overall strategy (of increasing shareholder value, if the company is run right).

[fenders53]

The article you posted is informative. It's a confusing circle of worldwide litigation. I don't see how it could be constructive for either side. I'm sure they think they have done the math and believe this is a good idea.

[Otter]

If this is in fact an attempt to reach a negotiated discount on use of QCOM technology, here's a typical playbook:

1. First lawsuit filed
2. Both sides now engaged, seek competitive advantage in litigation to improve the negotiating position of their respective businesses.
3. This leads to a multiplicity of counter-claims and additional suits/actions in a number of forums
4. Litigation costs mount, and a clearer picture begins to emerge to both sides as to the relative strengths/weaknesses of their positions as the various claims progress
5. The C-Suite gets a 30,000-foot view of the relative positions of the parties from the litigation team, and works that into the overall business plan
6. A business solution is found, which takes into account knowledge learned from 4 and 5, and any other external factors weighing on the deal. Stock price of both entities goes up, assuming it is not a completely terrible, one-sided deal, and outside counsel look for the next project they can bill out at $1,000+/hour

My semi-educated guess (don't have any insider info), is that we are somewhere in the range of steps 4 and 5.

[fenders53]

Thanks Otter. IMO step 3 is when it becomes too confusing for the typical investor to have a meaningful understanding of what this does to the investment thesis.

Not my intent to derail this away from QCOM, but tech investing is so tough to analyze, and tech + legal seemingly impossible.

If I am in PFE and it comes to light their drug is killing way too many people, it's clear to anyone this problem might be around for a decade or more of litigation. Same thing if I fail to immediately take action when the forklift I manufacture is defective. In technology, many of these fights become fairly meaningless with the passage of only a few years.

[Otter]

(02-28-2019, 11:34 AM)fenders53 Wrote: Thanks Otter.  IMO step 3 is when it becomes too confusing for the typical investor to have a meaningful understanding of what this does to the investment thesis.  

Not my intent to derail this away from QCOM, but tech investing is so tough to analyze, and tech + legal seemingly impossible.

If I am in PFE and it comes to light their drug is killing way too many people, it's clear to anyone this problem might be around for a decade or more of litigation.  Same thing if I fail to immediately take action when the forklift I manufacture is defective.  In technology,  many of these fights become fairly meaningless with the passage of only a few years.

I view this sort of litigation as high-end patent trolling, rather than your typical liability set-up from defective drugs, medical devices, or products. The latter can drag on for up to a decade, but companies are typically pretty good at setting adequate reserves for those litigation contingencies. Big jury awards in the trial court are just an opening salvo to the appellate round, and for drug/medical device liability especially defense counsel have gotten very effective at attacking the necessary scientific linkage (such as specific causation to a reasonable degree of medical probability) between an injury and claimed damages. In many forums, they also have significant weapons available such as remittitur. Usually the initial jury award is, again, a starting point for a negotiated settlement during the appellate phase. Plaintiffs in those cases are also typically severely injured/ill individuals or their surviving families, and their attorneys are working on a contingency fee basis, so they have every motivation to stay in as long as it takes to effect some sort of meaningful recovery. 

What's going on between Apple and QCOM is just the legal extension of a business dispute (does Apple need QCOM's tech more, or does QCOM need Apple's revenue stream more, and who has a better negotiating position to increase their share of the pie). Outside counsel handling the case are billing $1,000+/hr for each partner working the case, plus costs on top of that. Dragging these sorts of things out indefinitely doesn't really benefit anyone. At some point, clear-eyed attorneys on both sides can paint a basic picture for the executives--"here are the potential outcomes, the following outcomes may be the most likely to occur, and here are the risks/benefits associated with each outcome." It's then up to the executives to use that information to get the best deal they can for the business.

[fenders53]

Thanks, that was insightful. These cases seem fairly common, and I have really never understood the endgame. This gives me some level of clarity.

[Roadmap2Retire]

I used to own QCOM because I really liked how the technology was pervasive in all sorts of mobile devices -- no matter if you go with Apple or Android, all seemed to rely on QCOM tech.
However, over the years, I didnt like how the incentives misaligned with management & board decisions and decided to sell and exit the position after a decent profit. Case in point was record executive compensation for Mollenkopf et al. Another major point was the billions of stock buybacks occurring on open market, while the share count increased, collapsing ROIC etc.

The high profile litigation issues against AAPL are definitely concerning. Something that I wouldn't want to get caught in with my assets. There are better tech/semiconductor plays (like AVGO perhaps, even though its not exactly the same addressable market) without the risk that comes with QCOM.

[fenders53]

There is nothing more important than risk analysis in a tech stock. I've had huge wins and devastating losses the past 25 five years in large cap tech. The first thing I do is push the near-term noise aside and pull up a 20 year stock chart. That is about as clear a picture as you ever get as far as what happens when things go really bad, whether company related, or just a bad bear market. I currently fail to see QCOM as riskier than some of these way over-priced darlings of 2019. Of course QCOM can go down some from here. It's not risk free.

Pull up a long chart on QCOM and then convince me it is more risky than the market's long-term darlings. MSFT, INTC, AMD, NVDIA, CSCO, IBM and the list goes on.

This isn't meant to be overly aggressive Roadmap. I appreciate your recent frequent participation on the forum. Full disclosure, while I love to buy and hold for decades, that mostly hasn't worked out so well in tech. I would enter QCOM as a longish swing-trade, and hope they prove me wrong so I can find a reason to hold at least half of the position long-term.

[Roadmap2Retire]

I never said that its riskier than INTC, NVDA etc. although there are bull/bear cases to be made either way. I dont own any tech stocks since they have been bid up so high. The P/S on NVDA is 8 for crying out loud, and unless the company can grow its revenue exponentially does not warrant that kind of a multiple. Even after a fall of ~40% over the past few months, I think it is still overvalued!

Tech is tricky for long term buy-and-forget DGI style investing because it changes so fast. The sector suffers from the Red Queen Effect simply due to the nature.

[Otter]

(02-28-2019, 01:44 PM)Roadmap2Retire Wrote: I used to own QCOM because I really liked how the technology was pervasive in all sorts of mobile devices -- no matter if you go with Apple or Android, all seemed to rely on QCOM tech.
However, over the years, I didnt like how the incentives misaligned with management & board decisions and decided to sell and exit the position after a decent profit. Case in point was record executive compensation for Mollenkopf et al. Another major point was the billions of stock buybacks occurring on open market, while the share count increased, collapsing ROIC etc.

The high profile litigation issues against AAPL are definitely concerning. Something that I wouldn't want to get caught in with my assets. There are better tech/semiconductor plays (like AVGO perhaps, even though its not exactly the same addressable market) without the risk that comes with QCOM.

Good points on the management pay and poor handling of buybacks. 

AVGO does raise an interesting issue, though. AVGO tried to buy QCOM last year, and one of the more interesting things to come out of that saga was the national security component of QCOM's tech. The merger was blocked, due to national security concerns (this mobile chip technology is in just about anything that communicates over cell networks, and is obviously of keen interest to the Pentagon and our three-letter agencies). The U.S. government did not want AVGO/China/Huawei getting its hands on the source of a substantial percentage of mobile data chipsets. 

In a way, I view QCOM's position as somewhat similar to BA/LMT. There is a strong defense component to its tech, and the government has made clear that it is not for sale to outside bidders. Of the five major chipset manufacturers for mobile phones, only two are based in the U.S., QCOM and INTC. I don't think that anyone can credibly argue that INTC has superior tech (they whiffed badly on 10nm, and appear to be substantially behind the curve on 7nm). I say this as an INTC shareholder. I doubt an INTC/QCOM merger would ever pass antitrust scrutiny, so I think we are left with a duopoly of QCOM/INTC in this space, with the government taking a protectionist view of these companies for so long as their tech is competitive and makes up the backbone of modern mobile communications infrastructure.