Qualcomm's Time To Decide Its Fate Has Come

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)

Qualcomm Inc.'s (QCOM) problems seem to get more profound, and it could find itself in a do-or-die situation. Broadcom Ltd. (AVGO) is in hot in pursuit to acquire the company, while Elliot Management continues to pressure Qualcomm to boost its bid for its pending acquisition of NXP Semiconductors NV (NXPI). 

Despite reporting better-than-expected fiscal first-quarter 2018 results, Qualcomm shares are falling by about 1.5 percent. Qualcomm issued revenue guidance in the range of $4.8 billion to $5.6 billion, below expectations of $5.6 billion. 

The weak business outlook was preceded by Broadcom issuing its own strong outlook, followed by Elliot Management continuing to look for a higher acquisition price for NXP Semiconductor. 

QCOM data by YCharts

Elliot Pounces

Qualcomm's poor showing continues to illustrate why it needs to close the NXP deal, given the portfolio diversity NXP can offer that could help grow Qualcomm's revenue stream. 

Elliot Management is entirely aware of this and followed Qualcomm's poor results by announcing it has increased its stake in NXP to 7.2 percent, up from 6.9 percent as of January 25. Elliot also believes that NXP is worth at least $135 per share, which is nearly 22 percent higher than Qualcomm's initial bid of $110, and almost 12 percent higher than NXP's current price of roughly $121. 

Broadcom's Muscle

As if Qualcomm's poor 2Q revenue projections weren't enough, Broadcom announced on January 31 that despite some weakness in its wireless business, the rest of the company was doing well. In fact, as we previously noted, it issued second-quarter revenue guidance that was nearly 11 percent above analyst estimates. (See more: Chipmaker Broadcom Doesn't Need Apple To Rebound.)

Tough Decision

Broadcom's better-than-expected guidance was perhaps a call to Qualcomm investors to side with them in their pursuit of Qualcomm.  Elliot, of course, can sense Qualcomm's weak positioning and is pushing its agenda. 

Should Qualcomm do nothing and leave its NXP bid as is, or present a price less than Elliot is calling for, Qualcomm could face an acquisition from Broadcom. Meanwhile, paying too much for NXP could hinder the financial health of the business and the stock price. 

Qualcomm's recent stock performance and disappointing business outlook leaves the company in the unenviable position of having to choose between the lesser of two evils.  

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.