With The NXP Deal Called Off, What Lies Ahead For Qualcomm?

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During its third-quarter earnings call, Qualcomm said that it would scrap its planned $44 billion acquisition of chip maker NXP Semiconductor after it failed to secure approval from Chinese regulators, in a move that comes as a setback to the company’s strategy of diversifying away from the smartphone market to areas such as automotive and the internet of things. Below, we take a look at why the deal fell through and what could lie ahead for Qualcomm.

We have a $63 price estimate for Qualcomm, which is marginally ahead of the current market price. View our interactive dashboard analysis on Qualcomm’s Qualcomm’s expected performance over 2018 to see our forecasts and valuation estimate.

Trade Tensions Between China And U.S. Hurt Deal

While the deal was approved by eight out of nine relevant global regulators, the deal had been held up by the Chinese antitrust authority, which has a say over acquisitions in which at least one party has a meaningful presence in the Chinese market. As the escalating trade tensions between the U.S. and China reduced the probability of seeing a green light, Qualcomm indicated that it wouldn’t extend the agreement, which expired on Wednesday night. Qualcomm will have to pay a termination fee of $2 billion to NXP.

Qualcomm’s Plans To Diversify Face A Setback

Qualcomm was betting on the NXP acquisition to help it diversify away from the saturating smartphone market towards other fast-growing areas such as the Internet of Things and automotive semiconductors. However, with the deal called off, the company will have to focus on expanding in these areas on its own. While Qualcomm has seen success in some of these segments, it’s unlikely that it will match the scale of NXP in the near term. The company’s revenues from outside the mobile market stood at about $3 billion last year, marking an increase of 75% compared to the last two years.  The company has also been expanding its pipeline of automotive design wins, with its backlog rising by about $2 billion since January to about $5 billion currently. The company has been witnessing reasonably strong growth in its industrial IoT business, with revenues on track to double this fiscal year compared to two years ago. Qualcomm expects the addressable market in the industrial IoT space to grow at a CAGR of 20% over the next few years while indicating that its IoT revenues growth could outpace the market.

Qualcomm Will Look To Set Things Right In Its Core Business

Qualcomm will focus on strengthening its core technology licensing business, which has been the subject of litigation and regulatory action over the last few years. For instance, the company has been looking to build goodwill with a broader base of handset vendors by capping royalties, and it is also looking to settle its litigation with Apple by the end of this year. The company is also building a leadership position with regards to intellectual property in the 5G space, both in terms of standards and standard essential patents. On the chipset front, Qualcomm recently showed off the world’s first millimeter wave antenna module that works alongside its Snapdragon 5G modem on the high-frequency bands that are used for 5G services. It has also noted that all of its Snapdragon 800 OEMs have plans to launch 5G smartphones in 2019.

Separately, Qualcomm has indicated that it plans to allocate $30 billion towards its share buyback program, replacing its existing $10 billion repurchase plan. The move could deliver an EPS increase of  $1.50 per share, which is roughly in line with what NXP would have contributed to the company’s bottom line. The move should also bode well for the stock, which has remained largely listless over the last five years.

 

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