Shares of Qualcomm (NASDAQ: QCOM) fell 10.8% in March on weakness in tech stocks and concerns about its competitive strength. The company announced a big increase in its dividend, which now reaches a yield of 2%. But that wasn’t enough to overcome the tough news coming from a major trade show in the mobile device industry.
There wasn’t much news about Qualcomm last month. the semiconductor inventory struggled in early March with the rest of the market. Investors feared that the conflict in Ukraine could lead to widespread geopolitical instability. While Qualcomm derives less than 1% of its revenue from Russia and Ukraine, it has been dragged down along with other tech stocks.
Qualcomm may also have been hurt by a change in the competitive landscape. Rival smartphone chipmaker MediaTek has made several big announcements at Mobile World Congress, an annual trade show held in Spain. Qualcomm and MediaTek used the event to announce new products for the next generation of smartphones.
MediaTek is clearly trying to steal Qualcomm’s market share in mid-range and high-end devices. The Taiwanese chipmaker has already established itself as a contender in budget phones, but this new announcement casts doubt on Qualcomm’s dominance in a key area.
MediaTek went further by announcing that it overtook Qualcomm in market share for Android phones during the fourth quarter, based on third-party market analysis. Qualcomm disputed this claim, citing another market research report. No matter who’s right, it’s hard to deny the erosion of Qualcomm’s leadership position.
Investors don’t like any sign that a economic gap is disappearing. This is especially true during periods of low risk appetite in the market, as we are currently seeing.
Semiconductor stocks can be difficult to value. It is a competitive market with new generations of products launched every two years. If one generation is underperforming, a company can lose a lot of momentum and quickly fall behind rivals. This is exactly why investors reacted negatively to the MediaTek news.
If the threats to Qualcomm’s competitive position are real, it’s likely to create a drag on cash flow in the future. Semiconductor companies will have to compete on a combination of price and quality. Price competition drives down sales and margins. Both companies will likely also have to invest heavily in product development and marketing, further reducing their profits. In the worst case, demand for Qualcomm’s products will be reduced.
Qualcomm is a respected leader in the semiconductor market for mobile devices. The company indicated that it has great growth opportunities related to the Internet of Things, automotive and laptop markets. The stock is currently the cheapest in years, with a forward price-to-earnings ratio of 12.6 and an enterprise value of 12.4 per EBITDA. If you think Qualcomm can build on its strong market position and expand into new markets, this could be a great price to get started.
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