Qualcomm, Inc. (NASDAQ:QCOM) earnings are slated for release Tuesday, and although QCOM is expected to report slight increases in profit and sales, a call to break up the company might just steal focus.
QCOM is a major player in the market of manufacturing chips for mobile devices such as smartphones and tablets. Indeed, with customers ranging from Apple Inc.’s (NASDAQ:AAPL) iPhone to ZTE Corporation‘s (OTCMKTS:ZTCOF) Grand S, QCOM is a monster in the business.
Unfortunately, even when the chip business is good, it’s not all that great.
Making chips that connect mobile devices to cellular networks is a relatively costly and low-margin affair. QCOM’s other main source of revenue — licensing its patents — is very high-margin and profitable. As a result, chip operations generate almost all of QCOM’s revenue, but the licensing business contributes almost all of its profits.
With corporate break-ups in fashion these days, perhaps it was only a matter of time before an activist investors demanded the same thing from QCOM. So, it shouldn’t be much of a surprise that hedge fund Jana Partners amassed a stake in Qualcomm stock, making it one of the company’s largest shareholders, and soon called for the company to split the chip and licensing businesses.
QCOM Faces Tough Competition
It sounds like an idea whose time has come — QCOM proposed the same thing 15 years ago before shelving the idea — but it would be tough to pull off. Sure, it happens — witness what’s happening at General Electric Company (NYSE:GE) — but most of the time, companies are loathe to make themselves smaller.
Furthermore, QCOM says having the chip and licensing businesses under one roof confers benefits on them both.
Either way, shareholders must want QCOM to do something to get its share price rising again.
Qualcomm stock is off 8% year-to-date, lagging the broader market by about 10 percentage points. The tale of the tape is even worse over the last 52 weeks, as QCOM stock is sitting on a 15% decline.
The semiconductor industry is cyclical, but there are other concerns for QCOM, namely stiffer competition. Samsung Elect Ltd (OTCMKTS:SSNLF) — the largest maker of Android smartphones in the world — is making its own chips these days, and that’s been a big blow for QCOM. Indeed, it was one of the factors the company cited as reasons for cutting its 2015 revenue forecast.
The most recent quarter is expected to be one of growth. Earnings per share are forecast to rise to $1.33, up from $1.31 in the prior-year period, according to a survey by Thomson Reuters. Revenue is projected to increase 7.3% to $6.83 billion.
QCOM has been in a downtrend since last summer and there’s no reason to think that earnings will break the spell. Even the push by Jana Partners failed to juice the stock.
QCOM is still a major market player and (in this case, at least) shareholders have an ally in an activist hedge fund. But, that makes QCOM a hold more than a buy. It will get going again one day, but it’s hard to gauge when that day will come.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
