Litigation Bruise Won't Debilitate Qualcomm

Abhinav Davuluri: Qualcomm is a major player in the smartphone space, and we see an appropriate margin of safety with shares currently trading in 4-star territory.

The firm boasts a narrow-economic moat stemming from intangible assets related to its patent portfolio, on which its able to collect a royalty on every 3G and 4G mobile device. Recent allegations levied against the firm by South Korea, the U.S., and Apple have caused the firm's licensing business to be called into question. As a result, Qualcomm's stock has fallen considerably in recent months. We expect our fundamental thesis on Qualcomm, as it pertains to its ability to collect royalties on its patent portfolio, to be upheld. That being said, we don't think Qualcomm will come out of the litigation process unscathed, and we surmise the financial fallout will be fines on the order of $1 billion, with South Korea already levying a fine of roughly $865 million.

Given Qualcomm's hefty cash balance, these fines aren't debilitating. Our fair value estimate is $68 per share, and we continue to like the strategic rationale of the firm's pending acquisition of NXP Semiconductors, which is expected to close by the end of 2017 and will result in some much-needed diversification that will allow Qualcomm to better address the burgeoning automotive market for chip content.