Wedgewood Partners Comments On Qualcomm
There's a lot been said about JANA Partners' target Qualcomm ($QCOM), but it's done little to stop the slow slide lower for the stock [our older and brief thoughts]. The tech giant is a mini hedge fund hotel for small and underrated hedge funds. Trapeze Asset talked Qualcomm a bit ago [letter here] and now Wedgewood Partners is talking Qualcomm in its latest investor letter. Here's Wedgewood's thoughts on Qualcomm:
Qualcomm continued to detract from relative performance during the second quarter. However, we are still maintaining Qualcomm as the largest weighting in portfolios (excluding cash), as its absolute risk-reward proposition skews very favorably, compared to alternative opportunities. Earlier this year a key overhang was removed after Qualcomm settled an investigation by China’s National Development and Reform Commission (NDRC), regarding alleged anti-monopoly violations. Prior to the settlement, Qualcomm’s licensing business was not effectively participating in the local smartphone market, as many original equipment manufacturers (OEM) flouted the Company’s wellestablished, globally recognized intellectual property. That said, we believe most of the non-compliant OEMs do not compete in Western markets, much less outside of China, which is where Qualcomm generates the vast majority of its licensing revenues. As Qualcomm’s IP is increasingly enforced across China’s emerging smartphone OEMs we estimate the settlement could represent 5% to 10% upside for earnings over the next few years. While Qualcomm’s licensing business represents about two-thirds of the Company’s profitability, the chipset business represents most of the balance. Qualcomm’s chipset business has stumbled of late, losing key application processor sockets to in-house rivals, particularly Samsung, while ceding share to MediaTek in basebands. Though Qualcomm’s chipset business is witnessing increased competition, the Company’s ubiquitous “system on a chip” platform, and pioneering technology in mobile connectivity has them maintaining 11 over half the revenue share in the application processor and baseband markets.2 Despite these near-term pressures, we see this as more than priced into shares. At just over $100bn in market cap, Qualcomm has about $20bn in net cash on the balance sheet after the Company issued $10bn in debt (about half of that at rates lower than or equal to the current dividend yield) with the intention of executing an accelerated repurchase program. Further, if we capitalize the still-growing income stream from Qualcomm’s licensing business - even assuming a sub-market multiple - we surmise that shares imply close to zero value (and maybe even slightly negative) for the Company’s chipset business. In other words, effectively winding down the chipset business would generate more value than what the market is assigning it, which is quite draconian, considering Qualcomm’s still dominant presence in mobile chipsets, and growing licensing franchise.