Although the quarterly earnings report from Qualcomm, Inc. (NASDAQ:QCOM) will impress its investors, the stock is unlikely to close at the takeover price offered by competitor Broadcom Ltd (NASDAQ:AVGO) anytime soon. The reason is simple: What management did not say during the conference call will speak volumes.
Qualcomm earned $0.98 a share on revenue of $6 billion. Revenue growth was basically flat (0.2% year-over-year increase). Both numbers beat consensus estimates, yet it is the lack of sales increase that investors should notice. Qualcomm is not getting paid by Apple Inc. (NASDAQ:AAPL) and its vendors.
Until the royalty payment rate dispute is resolved in court, the smartphone chip maker will underreport revenue. Had QCOM collected the royalty payments, the stock would probably trade higher today. The stock’s fair value will stay low until analysts and the press properly report on the true value of Qualcomm’s IP (intellectual property).
On Jan. 31, it struck a deal with Samsung to show that its licensing model still has a future.
Apple has little to lose in refusing to pay QCOM. If it wins, it cuts costs, and profits soar even further. If it loses, it pays the amount owed plus some interest. But there is more at stake for the Android market if Apple wins.
Apple Attacks Android
If courts side with Apple, it would put into question the licensing model that is in place in other markets, including the pharmaceutical industry and software. Competition with Android would be crippled if Apple won because that would weaken Qualcomm’s technology as a key enabler in Android. Until the dispute with Apple ends, QCOM’s true share value will stay low.
Broadcom offered $80 a share to buy out the company, but the stock is now trading under $65. This signals the market does not believe the two companies will strike a deal and weakens the argument that QCOM stock will get to $80 anytime soon.
During its recent earnings call, QCOM did not mention Broadcom at all. That missing mention speaks volumes: Management will not entertain Broadcom acquiring the company at this time.
Outlook
Helped by a favorable mix and product cost actions, Qualcomm expects strong YOY performance in the second quarter. Still, it forecast revenue of $4.8-$5.6 billion, below the consensus of $5.6 billion. Earnings of between $0.65-$0.75 will come in below expectations of $0.86 a share.
The lower number is due to the quarter being seasonal weaker. Chinese New Year in the current quarter also adds to the slowdown experienced during this time.
Without including any revenue from Apple, Qualcomm’s outlook is strong because of new smartphone launches from its customers. Android makers are building up production of flagship phones ahead of time. This gave earnings before taxes a strong lift in the first quarter where it was up 32% YOY.
With demand for 3G and 4G still strong in China overall for this year, shareholders should expect revenue from this stream continuing to offset the lost revenue from Apple.
5G a Tailwind
Many OEMs will adopt 5G and plan to get ahead of the global markets by launching the technology by the first half of 2019. Since 5G brings with it gigabit LTE and two additional frequencies in RF, Qualcomm will bring these new technologies that other competitors cannot match.
Takeaway for QCOM Stock
Qualcomm is not an $80 stock and will struggle to get there for a while. It still must fight off a buyout from Broadcom while getting back the royalty payments from Apple. Until then, QCOM stock will trade at a discount.
