It’s been almost two years, in mid-February 2018, since Broadcom (NASDAQ:AVGO) made a final offer to pay $117 billion for Qualcomm (NASDAQ:QCOM). Today Qualcomm stock is almost three bucks higher than the last price offered, or $82 a share. Yet Qualcomm’s stock market value today is lower than the dollar value of Broadcom bid.
What happened since shows both the benefits of buybacks and the upside in Qualcomm’s 5G future.
President Trump nixed the deal in March 2018 since he considered Broadcom, majority controlled by Chinese interests, to be a national security concern.
Today, Qualcomm’s stock market value is about $96 billion. Sometimes it’s worthwhile to look back and analyze a buyer’s bid and how things worked out when the deal is not closed.
It’s All About the Buybacks
At the time, in Q1 2018, QCOM stock was trading in the mid-$60 range. The $82 per share offer by Broadcom was a 26% premium to QCOM’s market value then.
But here’s what’s interesting: At the time, Qualcomm had 1,482.6 million shares outstanding as of the end of March 2018. Today, QCOM has just 1,141.8 million shares outstanding. And Qualcomm stock is now trading for $84.92 per share.
In other words, the Qualcomm stock price per share is higher than Broadcom’s cash and stock offer of $82, but the market value is lower today. That is because there are 341 million fewer shares outstanding, or 23%.
So the market value of the Broadcom bid was $117 billion, but today, though QCOM’s stock price is higher, the market value of Qualcomm stock outstanding is only $96 billion.
Qualcomm has benefited its shareholders with the share buybacks. These share repurchases pushed up QCOM stock to the value of the Broadcom bid less than two years earlier.
Is Qualcomm Worth $117 Billion Today?
Broadcom was willing to pay $60 per share in cash or about $100 billion. A dozen banks signed up to finance the cash portion. The cash portion was most of the bid value and the rest was going to be paid in AVGO stock.
At the time this was going to be the largest technology acquisition ever, according to Reuters.
A key question that Qualcomm stock holders must have now is this: if Broadcom thought Qualcomm was worth $117 billion and was willing to pay $100 billion in cash for most of the deal, is Qualcomm still worth that today? After all, the stock is now above the original deal price, but not the deal value.
Qualcomm’s Financials are Better and 5G’s Future is Clearer
I suspect so. For one, Qualcomm now has almost $2 billion more in revenue than in 2018. For example, at the end of March 2018, QCOM’s trailing-12-month (“TTM”) revenue was $22.5 billion. At the end of September 2019, TTM revenue was $24.3 billion.
In addition, in March 2018, the TTM operating income was $4.9 billion. But by Sept. 30, 2019, TTM operating income was $8.1 billion. This is 65% higher.
More importantly, it is now much more clear that QCOM stock will be a significant beneficiary of the coming 5G switch. I wrote about this last month in my article on Qualcomm’s upside with 5G.
Suffice it to say that Qualcomm expects 5G to take-off faster than 4G. And the 5G revolution will not only affect cellular networks but also Internet-of-Things (“IoT”), automotive and other applications.
The Value of Qualcomm Stock
Analysts now expect Qualcomm’s earnings per share will hit $6.10 by September 2021. That puts its Qualcomm stock price at only 13 times earnings.
But remember Broadcom was effectively willing to pay over 26 times earnings for Qualcomm, mostly in cash. How do you arrive at that figure? Well, in Qualcomm’s fiscal year ending September 2019 Qualcomm made $4.286 billion in net income. So $117 billion divided by $4.39 billion is 26.6 times earnings.
So, at least to one bidder, Qualcomm stock is worth 26 times earnings. Taking $6.10 (less than two years out) times 26 times earnings is $158.60 per share. That is 89% higher than today’s price.
Since Qualcomm has 1,141.8 million shares outstanding, its market value at $158.60 is $181 billion. So, yes, Qualcomm is still worth significantly more than what Broadcom was willing to pay ($117 billion).
Sometimes reviewing a previous deal history helps you put the present value of equities like QCOM stock in perspective.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks, which includes both high dividend and buyback yields. In addition, subscribers a two-week free trial.