In the last quarter, markets bid Qualcomm, Inc. (NASDAQ:QCOM) up in the single digits. The stock underperformed the Nasdaq Composite index, which rose around 9%, compared to 6.6% for QCOM stock.
Instead of worrying over litigation and antitrust investigations against Qualcomm, shareholders should turn their attention on the company’s fiscal third-quarter results.
A Look at Qualcomm’s Second Quarter
In the second quarter, Qualcomm earned $1.34 per share on revenue of $6 billion, beating consensus estimates. QCOM ended the quarter with cash (and cash equivalents) of around $29 billion.
The company benefited from its partners refreshing smart phone devices. Samsung (OTCMKTS:SSNLF) announced the Galaxy S8 and s8+ would use the new Snapdragon 835 chip. Sony Corporation’s (NYSE:SNE) Xperia XZ premium and Xiaomi’s Mi 6 also announced it would use that same chip.
Companies in China continued to drive QCOM’s revenue. Over 200 devices are using the Snapdragon 600 and 400 platform.
Third-Quarter Forecast for QCOM Stock
On April 19, Qualcomm forecast revenue of between $5.3 billion and $6.1 billion and non-GAAP earnings of between 90 cents and $1.15 per share for the third quarter. Investors must remember that Qualcomm later issued a revenue forecast below the $5.9 billion consensus due to its uncertainty over Apple Inc.’s (NASDAQ:AAPL) contract manufacturers underpaying royalty fees.
Telstra launched the first gigabit LTE network, so adoption of Snapdragon X16 Gigabit LTE modem may lift Qualcomm’s revenue this quarter. Since Samsung Galaxy S8 uses this chip, chances are good that the company will report strong sales from that area. Management has high expectations for Gigabit LTE’s growth potential. 5G, NR, multimode and millimeter wave are also important technologies that QCOM is investing in. In the years ahead, this will keep the company relevant in the smart phone business.
5G will not drive revenues higher in Q3 but investors will want to listen to management’s outlook on the technology. QCOM leads in 5G technology. The smart phone product refresh to 5G benefits the company. For now, the company is conducting trials for 5G technology with Ericsson (NASDAQ:ERIC), AT&T Inc. (NYSE:T) and Vodafone Group Plc (ADR) (NASDAQ:VOD).
Favorable Valuation Ahead of QCOM’s Earnings Report
QCOM stock is going into its earnings at a forward price-to-earnings ratio of 15 times and a P/E of 18.7 times. With $21.22 per share in book value and $6.76 a share in cash, Qualcomm is very appealing for value investors. But its spat with Apple is creating a cloud of uncertainty over the royalty rates. A FTC antitrust lawsuit against the company is hurting the stock price, too.
The NXP Semiconductors NV (NASDAQ:NXPI) acquisition is still up in the air. European regulators did not yet approve the deal. Also, the majority of NXPI shareholders did not tender their shares. QCOM management may express optimism the deal will go through when it holds an earnings conference call with shareholders. It may also need to make concessions with European regulators to get the deal to go through.
Offering a higher stock price for NXPI shareholders seems unlikely. After all, NXP’s management already endorsed the deal.
With a dividend yield of 4.1%, income investors will find Qualcomm appealing. However, there are near-term uncertainties that are holding the stock back. Fundamentally, smart phone demand is getting stronger and the use case for 5G technology will add positively to the company’s future revenue.
Even if QCOM stock gets a lift if it reports strong results, investors need not hesitate to accumulate shares.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.