Adding to the worries about the near future, smartphone shipments are expected to be much more moderate over the rest of calendar 2017. Qualcomm is projecting 3%-9% growth year-over-year – which against a 20% figure implies a flat or even contracting market over the next three quarters. In that context, the Q2 beat looks far less impressive. It simply looks as if Qualcomm had some profits move into the quarter and out of fiscal Q3.
And it looks as if the Apple issue still remains potentially damaging for Qualcomm stock.
Stay Away From QCOM Stock
All told, Qualcomm’s fiscal Q2 just wasn’t enough. I’ve considered the company a value trap for some time, and the Q2 numbers don’t change that opinion.
UPDATE: Nor does the Qualcomm earnings call. While analyst questions unsurprisingly focused on the Apple negotiations, management disclosed that another licensee has decided not to pay more than $150 million in royalties.
At a certain point, Qualcomm’s licensing model has to be called into question.
The company has lost antitrust cases in both Korea and the U.S. It recently lost nearly $1 billion in an arbitration case to BlackBerry Ltd (NASDAQ:BBRY). Apple and its suppliers aren’t paying; now another major customer is balking at licensing terms. Qualcomm’s QTL revenues aren’t going to zero; but customer disputes materially change the profit outlook in that business.
And that in turn raises questions about whether Qualcomm can grow earnings from this point, or if it will just play defense against its customers for the next few years.
There’s simply too many risks at this point to consider Qualcomm stock, even at 11x earnings. Customers are suing and/or not paying. The smartphone market, globally, is starting to slow, with ASPs coming down. There are a lot of potential hazards for Qualcomm stock over the next few quarters.
And a modest beat to earnings this quarter isn’t enough to take on the risk in QCOM stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.