Qualcomm, Inc. (NASDAQ:QCOM) is set to report third-quarter fiscal 2017 earnings results after market closes today. And while the San Diego-based semiconductor giant — down some 14% year to date — hasn’t delivered the returns investors hope for this year, it’s still tough to ignore the potential value QCOM stock.
From a risk-versus-reward perspective, Qualcomm’s fiscal 2017 forward multiple of 13, versus a price-earnings ratio of 19 for the S&P 500 Index, suggest little to no growth. Plus, when adjusting out its cash pile of $10 billion, that multiple is closer to single digits.
Not only does the company have a strong balance sheet to lean on (including another $6 billion on operating cash flow), QCOM stock looks like a no-brainer, especially when factoring its robust dividend yield of 4%. But for Wall Street to care about these things, QCOM must answer the call Wednesday.
For the quarter that ended June, Wall Street expects Qualcomm to report 81 cents per share on revenue of the $5.26 billion, translating to year-over-year declines of 30% and 12.8%, respectively. For the full year, ending in December, earnings of $4.24 per share would decline from $4.44 a year ago, while revenue of $22.69 billion would decline 3.5% year-over-year.
The fact that profits for the quarter and full year are projected to decline has been the biggest factor impacting QCOM stock, which by climbing just 1.7% in twelve months, has underperformed both the Dow Jones Industrial Average (up 16.5%) and the S&P 500 (up 14%). Profits have been hamstrung by the vast legal disputes the company has engaged in, including the company’s royalty dispute with Apple Inc. (NASDAQ:AAPL).
Qualcomm in April announced that it had been informed by Apple that the iPhone maker would withhold payments to its contract manufacturers for the royalties those contract manufacturers owe. And Apple indicated that it would withhold payments until the legal issues have been resolved. And this could potentially impact Qualcomm’s earning-per-share numbers for this quarter.
At the same time, it underscores the degree to which the company has grown more dependent on the technology licensing side of the business, which now accounts for over 70% of its operating profits.
Revenue for the quarter could also be under pressure, as the company last month reduced its guidance forecast by $500 million to a new range of $4.8 billion to $5.6 billion, which pressured QCOM stock by almost 3%. But that said, the company’s massive patent portfolio, the bulk of which are in fast-growing industries such as mobile and 4G, 5G and next-generation wireless technologies, remain a huge advantage for Qualcomm.
Reasons to Bet on QCOM Stock
CEO Steve Mollenkopf has figured out ways to extend that advantage to enable Qualcomm to not only control prices and collect fees, it also insulates the company from potential competitive threats. Consider, almost every smartphone and wireless device manufactured around the world has to pay QCOM to be a player in mobile.
Despite the punishment in QCOM stock, the company last quarter grew revenues 8% year-over-year to $6 billion, while growing net income 28% YoY.
What’s more, revenue grew in virtually every segment that matter, including 10% rise in the CDMA Technologies business and a 5% rise in the Technology Licensing business. And when combined with growth in areas like automotive, networking and IoT, it is clear that while QCOM stock might appear broken, the company is not.
Plus, assuming that the Qualcomm’s bets on new areas, ranging from servers and PC chips will pay off, QCOM stock could have an Nvidia Corporation (NASDAQ:NVDA)-type recovery with eighteen months.
Bottom Line on QCOM Stock
Qualcomm has beaten Wall Street earnings estimates in ten straight quarters and I don’t expect that streak to end today. The question is, will the company guide in a way that earns Wall Street’s confidence? There’s also the question of the type of impact the recent litigation will have on current and future quarterly earnings. But regardless of what unfolds, betting on QCOM today is about the next eighteen months.
And with the company’s pending $47 billion acquisition of NXP Semiconductors N.V. (NASDAQ:NXPI) still on the table — a deal should give QCOM an expanding footprint in high-growth areas such as internet of things, automotive, security and networking — the pros of owning QCOM stock far outweigh the cons.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
