Qualcomm has been trying for months to break up the CPU market duopoly of Intel and AMD. The company has used Intel’s recent troubles to acquire the struggling chipmaker’s business. However, the stock has gone down over 18% in the last 3 months. The struggles are caused in part by the possible side effects of Intel acquisition in the short term, but we think they present a buying opportunity.
Qualcomm Inc. develops and commercializes foundational wireless industry technologies worldwide, including 3G, 4G, and 5G wireless connectivity. The company also designs integrated circuits and system software for mobile devices and other wireless products, driving innovation in mobile technology.
It is a key leader and facilitator of mobile communication technologies and possesses an exceptional patent portfolio. Its open licensing model enables manufacturers to use its technologies, encouraging innovation across the wireless ecosystem. The emphasis on on-device AI and IoT solutions cements its place among semiconductor giants.
Qualcomm’s revenue comes from two segments: Qualcomm CDMA Technologies (QCT), comprising hardware sales, and Qualcomm Technology Licensing (QTL), offering licensing rights to intellectual property. The company’s most notable products include mobile processors such as the Snapdragon series for smartphones and tablets, radio frequency transceivers and cellular modems, IoT solutions for smart devices, and licensing services.
The end market served by Qualcomm includes mobile communications, consumer electronics, automotive, and IoT sectors globally. Among its top clients are major smartphone manufacturers such as Apple, Samsung, and Xiaomi, as well as automotive companies that integrate wireless technologies into vehicles.
Qualcomm has been contemplating the acquisition of Intel’s business for some time, but it seems the company is after the prized patents for x86 processors. These patents are what give Intel and AMD their unique moat and Qualcomm wants to replace Intel in the duopoly.
The US Chips Act, which provides subsidies to semiconductor companies to start manufacturing semiconductors within the US, is one variable that has investors thinking a possible acquisition is on the cards. The US government is wary of its investments in Intel, which could go to waste if the company does not recover from its problems. A better company with better management may help the government achieve its semiconductor industry objectives.
This optimism aside, there isn’t much to look forward to for Qualcomm shareholders. QCOM is a $189 billion company with just $13 billion in cash. Intel is a $100 billion business. An acquisition of this size would put considerable strain on its books, which is why the stock has reacted negatively to the possibility of acquisition.
Moreover, there are also regulatory hurdles to consider. Last year in August, Intel had to abandon a $5.4 billion acquisition of Tower Semiconductor because it could not convince Chinese regulators. The issue is highly likely to resurface on a potential Intel acquisition.
The acquisition will also result in QCOM obtaining more than 60% market share in both smartphone and PC chip markets. This would cause antitrust issues in the US and Europe as well.
To sum up, QCOM acquiring Intel is likely to cause major issues in the short term. The financial and regulatory burden may be too much for the company to continue running its core business well. Once the company realizes that and abandons the thought, it will spur the next leg of the bull rally. The best time to be a part of that rally is now!
Qualcomm ranks 23rd on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 100 hedge fund portfolios held QCOM at the end of the second quarter which was 78 in the previous quarter. While we acknowledge the potential of QCOM as a leading semiconductor investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as QCOM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.