Qualcomm, Inc. (NASDAQ:QCOM) released its fiscal third-quarter report after Thursday’s bell, and the tepid response in QCOM stock tells you all you need to know about the lackluster results.
Qualcomm shares are off 3% in early after-market trading, putting the stock’s year-to-date losses at about 16%. This comes in stark contrast to major rallies across tech, including even old-line operators such as Microsoft Corporation (NASDAQ:MSFT), SAP SE (ADR) (NYSE:SAP) and Oracle Corporation (NYSE:ORCL).
The company did record a beat on both the top and bottom lines. Qualcomm earnings of 83 cents per share of QCOM stock were two pennies better than the consensus, and revenues of $5.3 billion were able to squeeze past Wall Street’s estimate of $5.3 billion.
But it’s important to keep in mind that, back in late April, QCOM lowered its guidance for the quarter because of the adverse impact of litigation from Apple Inc. (NASDAQ:AAPL), so the bar already was low.
Guidance was the real trouble spot. Qualcomm is forecasting earnings of 75 cents to 85 cents per share versus the consensus of 93 cents, and revenues are expected to range from $5.4 billion to $6.2 billion, compared to Wall Street’s $5.51 billion.
A few other highlights from the Qualcomm earnings report:
- Over the past year, the cash position has improved from $31 billion to $37.8 billion.
- Qualcomm’s proposed $38 billion acquisition for NXP Semiconductors NV (NASDAQ:NXPI) is expected to close by the end of this year. The transaction will be funded with a recent debt offering as well as cash from foreign entities.
- In the quarter, the company returned $1.1 billion to shareholders, which included $844 million for dividends and the remaining for share buybacks.
Technically speaking, Qualcomm could be in a bit of trouble should Wednesday’s after-market returns hold. The early dip in QCOM stock has brought shares below the 50-day moving average around $56, which is acting as support while shares test overhead resistance at the 50-day moving average.
Should Qualcomm break below the $56 threshold, there’s also price support around $54.75, then after that, the $52 area QCOM toyed with in April; that would be another 8% from Thursday’s close.
As for the fundamentals, QCOM stock does have a reasonable valuation, with a forward price-to-earnings ratio of about 15 and a dividend yield around 4% — one of the highest yields among large-cap tech.
But those factors don’t seem as attractive right now.
Qualcomm’s key issues is legal uncertainty. Back in January, AAPL lobbed a $1 billion suit against the company for unfair practices with the licensing of its technologies, which is the core of the QCOM’s business (it represents about 80% of the operating income). In other words, if a legal action invalidates the patent protection, shares likely would come under tremendous pressure.
As should be no surprise, Apple is playing hardball, such as ordering suppliers to suspend royalty payments. The company also bolstered its lawsuit ahead of the Qualcomm earnings report by bringing other phone makers into the litigation — and will even cover any fees. Already QCOM has estimated that there could be a grueling 31% to 41% drop in licensing revenues.
Qualcomm is fighting back, and the company has a long history of effectively defending its intellectual property. What’s more, QCOM is pushing hard to diversify its business, such as with the acquisition of NXP Semicondutors as well as the moves into emerging growth areas like the Internet of Things.
But the Apple effect is tough to ignore. The company seems intent on finding any way to lower its licensing costs — and it certainly has the resources to wage an intense battle.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.