Why Billionaire Bought This Chip Stock

A few years ago David Tepper was named one of the highest earning hedge fund managers. He is the founder of Appaloosa Management, a $5 billion hedge fund. One of his holdings is a chip stock that often flies under investors radars amid the hoopla surrounding Nvidia, and he’s bet $144 million on it.

The semiconductor stock he purchased is Qualcomm (NASDAQ:QCOM) and it’s a case study in what a great company with a solid moat looks like, but is it a buy at this time?

Qualcomm Is a Technology Giant

A few years ago Qualcomm was heavily dependent on the smartphone market and that was a double-edged sword. On the one hand, the growth of handheld devices was so high that Qualcomm’s business was booming but the dependency on a few key customers created concerns over revenue concentration.

As time went by Qualcomm smartly decided to mitigate those single market segment risks by expanding to serve the rapidly growing Internet of Things (IoT) segment as well as automotive and 5G infrastructure.

In IoT, Qualcomm’s wireless technology expertise applies to a wide range of applications from industrial to smart home devices. The company’s chips underpin the connectivity to the internet of these smart devices. 

The chip maker’s Snapdragon Automotive Cockpit Platforms has also made a splash in the automotive sector, supporting designs that power advanced in-car experiences that range from infotainment systems to driver assistance.

And in infrastructure development, Qualcomm rode the 5G network wave by providing essential hardware and software that is pivotal to enabling faster and more reliable internet connections. These are foundational to smartphones and also pave the way for remote healthcare applications, as well as smart cities.

These are among just a handful of areas that Qualcomm serves but where it really shines is the revenue it makes from a completely different source.

Qualcomm’s Jewel In The Crown

While revenue generation from chip sales accounts for the majority of Qualcomm’s revenues, licensing from patents forms a significant and predictable stream of income, producing higher margins and ensuring the company has the financial resources to maintain its competitive edge over rivals.

The patents form a competitive moat, making it challenging for new rivals to encroach on the Qualcomm’s dominant market share without infringing on its intellectual property.

The legal protection afforded by these patents further benefits the company by affording it higher bargaining power with customers. 

Chipmakers Moat

Like many great investors, Tepper seems to favor companies with a wide moat. Some of his biggest holdings are in top technology firms, such as Microsoft, Meta and Amazon. So too does Qualcomm enjoy a competitive advantage from its strategic partnerships.

The company integrates its technology into a broad range of products and services thanks to its partnerships in automotive, telecommunications, and electronics industries. Combined these enhance the firm’s innovation potential and market reach.

As a result of its various partnerships, Qualcomm has a front row seat into the cutting-edge innovations of various industries, helping it to make its offerings more relevant and competitive.

In short, these relationships form an intangible moat that cannot easily be disrupted by competitors attempting to emulate its success.

So what does it all boil down to on the stock front, is QCOM a buy?

Qualcomm’s Dividend Is Special

A testament to the fortitude of Qualcomm’s business model is that it has raised its dividend for 21 years straight. Note the difference between paying a dividend for that many years and increasing it are two very different things.

Medical Properties Trust, for example, has continued to pay a dividend for many years but last year slashed the annual payout by almost 50%. Qualcomm, by contrast, has increased its dividend annually and, in so doing, demonstrated the resilience of its business model for over two decades.

The company currently pays a 2.11% dividend yield via an annualized payout of $3.20 per share and has a payout ratio of 47%, so there is unlikely to be any concerns at any time in the near future about its sustainability.

Is Qualcomm Stock a Buy?

According to 26 analysts, fair value for Qualcomm stock is $151 per share, suggesting no meaningful upside at this time.

A discounted cash flow forecast analysis is slightly more optimistic and puts the intrinsic value of the firm at $160 per share.

Both analyses suggest that the stock’s 15% bull run over the past twelve months has largely captured the upside potential. So, while the company’s business model is robust, the reward to risk ratio for new investors at this time is less compelling.

Over the past year the company has been highly profitable and analysts expect no change on that front in the coming year, further emphasizing the fundamental strength of the firm.

Technically, the Relative Strength Index sits in overbought territory now, so both on a valuation basis and looking at the firm through a charting lens, investors may wish to wait for the stock to pullback before dipping a toe into the water.

With that said, Qualcomm is a stock that will likely appeal to conservative investors because share price volatility is muted and it’s no surprise that smart money investors like Appaloosa Management have taken substantial stakes in the firm.

The bottom line is Qualcomm has a proven tenure as a top technology giant over many decades and its technology leadership is unlikely to dissipate anytime soon. Certainly, up-and-comers abroad like MediaTek attempted to dislodge its leadership and market share at various times in the past but, through up cycles and down ones, Qualcomm has maintained its dominance by generally innovating a generation ahead and further broadening its patent portfolio.

So why did David Tepper buy Qualcomm stock? Qualcomm’s patent portfolio provides a wide moat and ensures higher margins than other chipmakers. It also has extensive partnerships that create an intangible but very real competitive advantage that is unlikely to be disrupted anytime soon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.