Activist hedge fund JANA partners is targeting Qualcomm (QCOM). We do not agree that Qualcomm should be split up but we do agree that Qualcomm is undervalued.
He then went on to explain how the chip-making arm, QCT, is undervalued relative to the licensing part, QTL,
You look at valuation here. This company’s multiple has de-rated by 30% in last three years while the Nasdaq up 40%. At a market multiple for the licensing business — which has 87% margins, and $6 billion of Ebit — that leaves you the chip business with a negative valuation. Obviously, it’s not worth a negative value; it has tremendous strategic value. We think they need to figure out what they can do to close that valuation gap.
Qualcomm’s recent announcement of a $10 billion share repurchase program is a step in the right direction but JANA wants it done quicker and at a higher amount.
But this company stood out among companies, with 30% of its market cap sitting in cash. They haven’t spent the money yet. The $15 billion is the right amount, but they need to accelerate it, and they need to do it before the value-creation steps we are outlining.
And this is probably all that will come of this “activism”. Qualcomm’s licensing business is derived from its chip business and separating the two doesn’t make that much sense. Qualcomm does have a lot of cash and the licensing business continues to generate even more, so a bigger capital return plan could be done.