Should QCOM Stock Be in Your Portfolio on Intel Takeover Speculations?

Speculations are rife that Qualcomm Incorporated QCOM will wait until the Presidential elections are over in the United States to decide on whether to stake a formal claim for acquiring Intel Corporation INTC. This is likely to offer Qualcomm greater clarity about possible administrative and bureaucratic changes the new occupant of the White House will implement relating to export control measures with countries like China and the antitrust landscape in domestic frontiers.

The proposed takeover bid is expected to redefine the sector dynamics, bringing to the fore some of the best technological know-how and in-depth industry expertise for developing state-of-the-art products in the semiconductor ecosystem. This is expected to have a key impact on China, which is reportedly one of the important markets for Qualcomm and Intel.

QCOM Plagued by U.S.-China Trade Spat

The chip-making firm has a significant presence in more than 12 cities in China, aiming to drive advancements in semiconductors and mobile telecommunications for the larger benefit. The company has been a key supplier of chips and other related components to local smartphone manufacturers like Xiaomi, Huawei and its spin-off brand Honor. However, Qualcomm is increasingly finding it difficult to maintain its operations in China.

Much of these hardships can be attributed to the continued U.S.-China trade spat. The U.S. Commerce Department has imposed various trade restrictions against China, including banning the sale of high-tech equipment, chips, components and related technology to develop high-end smartphones and AI-enabled chips. 

If Qualcomm manages to acquire Intel, it is likely to face potential headwinds as although China accounted for more than 27% of Intel's total revenues in 2023, the communist nation's purported move to replace U.S.-made chips with domestic alternatives significantly affected its revenue prospects. The recent directive to phase out foreign chips from key telecom networks by 2027 underscores Beijing's accelerating efforts to reduce reliance on Western technology amid escalating U.S.-China tensions. As Washington tightens restrictions on high-tech exports to China, Beijing has intensified its push for self-sufficiency in critical industries. This shift poses a dual challenge for Intel, as it faces potential market restrictions and increased competition from domestic chipmakers.

Soft Margins Dent QCOM Prospects

Over the years, Qualcomm's margins have declined due to high operating expenses and R&D (research & development) costs. The company expects softness in the handset market and a weaker overall mix of devices to continue in the near future. Shift in the share among original equipment manufacturers at the premium tier has reduced Qualcomm's near-term opportunity to sell integrated chipsets from the Snapdragon platform. Aggressive competition from low-cost chip manufacturers and established players in the mobile phone chipset market is also likely to hurt Qualcomm's profits. Although the global smartphone market is expected to maintain its momentum over the next three to four years, a major portion of this growth is expected to come from the low-cost emerging markets, which may weigh on Qualcomm's margins.

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QCOM Riding on Snapdragon Mobile Platform

Despite the short-term headwinds, Qualcomm is benefiting from investments toward building a licensing program in mobile. The company is well-positioned to meet its long-term revenue targets driven by solid 5G traction, greater visibility and a diversified revenue stream. In addition, the chip manufacturer envisions solid growth opportunities within the mobile space, driven by the strength of its Snapdragon portfolio.

Leveraging processors with multi-core CPUs with cutting-edge features, amazing graphics and worldwide network connectivity, Qualcomm Snapdragon mobile platforms are fast with superb power efficiency. Smartphones and mobile devices built with Snapdragon mobile platforms enable immersive augmented reality and virtual reality experiences, brilliant camera capabilities, superior 4G LTE and 5G connectivity with state-of-the-art security solutions.

Automotive Focus: Key Growth Driver for QCOM

The automotive telematics and connectivity platforms, digital cockpit and C-V2X solutions are fueling emerging automotive industry trends such as the growth of connected vehicles, the transformation of the in-car experience and vehicle electrification. Qualcomm believes it is on track to become the largest smartphone radio frequency front-end supplier by revenue in the near future. Automotive revenues surged 87% to a record high of $811 million in third-quarter fiscal 2024, driven by increased content in new vehicle launches with its Snapdragon Digital Chassis platform. This was the 15th consecutive quarter in which Qualcomm recorded double-digit growth in automotive revenues. The company expects automotive revenues to increase to more than $4 billion in fiscal 2026.

QCOM’s Price Performance

QCOM shares have gained 18.6% year to date compared with the industry’s growth of 31%. It has outperformed peers like Hewlett Packard Enterprise Company HPE but lagged Broadcom Inc. AVGO.

YTD Performance

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Estimate Revision Trend for QCOM

Earnings estimates for Qualcomm for fiscal 2024 have moved up 10.6% to $10.08 over the past year, while the same for fiscal 2025 has jumped 11.6% to $10.93. The positive estimate revision depicts bullish sentiments for the stock.

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End Note

With solid fundamentals and healthy revenue-generating potential driven by robust demand trends, Qualcomm appears to be a solid investment proposition. A strong emphasis on quality, diligent execution of operational plans and continuous portfolio enhancements are driving more value for customers. With improving earnings estimates, the stock is witnessing a positive investor perception.

However, stiff competition and softness in key end markets are likely to put pressure on the bottom-line growth. High R&D costs eroded its profitability to a large extent. Qualcomm is reportedly undertaking job cuts and retrenchments to sustain its business in China, raising questions about its long-term viability plans in the communist country. A probable Intel buyout is likely to raise further questions regarding its viability in China. With a Zacks Rank #3 (Hold), Qualcomm appears to be treading in the middle of the road, and investors could be better off if they trade with caution. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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