Qualcomm, Inc. (NASDAQ:QCOM) provided its shareholders with some much-needed cheer on Wednesday afternoon. After weeks of dispiriting headlines and terrible action in the price of Qualcomm stock, positive earnings can finally reset the story for the controversial company.
The company’s earnings report showed a big beat on the headline EPS number. On top of that, the company beat revenue estimates by a decent margin. That all came despite an overall 51% drop in profitability for the quarter, driven by a fall in phone chip sales and a rise in operating costs.
Still, analysts had expected significantly worse. Additionally, Qualcomm’s CEO said that the Q2 results reflected the strong overall nature of their semiconductor business despite current operational problems.
Looking forward, Qualcomm guided Q3 revenues in line with the prevailing analyst community consensus. On earnings, Qualcomm suggested that EPS will come up just short of previous expectations. Regardless, on the whole, it was a good enough report. Qualcomm stock is trading a bit higher in Wednesday after-hours action.
Good Earnings Trumped
QCOM stock owners are certainly relieved that the company put in a good quarter. Given all the other troubles of late, an EPS miss would have really hit sentiment badly. That said, don’t think this earnings report singlehandedly has the company back on track.
President Trump’s heated rhetoric about Chinese trade relations has really left Qualcomm in a rough place. For starters, Broadcom Inc (NASDAQ:AVGO) was supposed to acquire Qualcomm. The Trump administration nixed those plans.
And that’s not all. Qualcomm’s long-running effort to acquire Dutch rival NXP Semiconductors (NASDAQ:NXPI) is now under fire. So far, China has not granted regulatory approval for the merger. With Sino-US relations deteriorating, there’s a real chance China will block the deal as a form of punishing the US.
This leaves Qualcomm with limited options. When it was trying to resist the Broadcom takeover, it appeared they only had two major paths to improving shareholder returns. These were either completing the NXP takeover or a major share buyback.
NXP would be a big boost for Qualcomm, providing major inroads in the Internet of Things and autonomous vehicles. Without NXP, it will be stuck relying heavily on the no-longer-fast-growing smartphone market to drive sales going forward.
Expect Lukewarm Analyst Reactions
Despite the earnings beat, don’t expect a wave of upgrades in coming days. Already Wednesday afternoon, we got one comment from Moody’s analyst Rick Lane. He said:
“Qualcomm posted solid results but its guidance pointed to a softer handset market, particularly in China, and underscores the significance of closing the pending NXP acquisition, which remains caught up in a lengthy regulatory review.”
Unfortunately for Qualcomm stock, this is going to be the tone for awhile. Analysts aren’t going to stick their necks out there rushing to upgrade the stock while Trump and tariff concerns loom along with the unresolved patent dispute with Apple, Inc. (NASDAQ:AAPL).
As such, even with the stock down sharply over the past few months and the company topping earnings, don’t expect salvation for the stock price in the short run.
Qualcomm Stock: Headline Risk Hides Opportunity
Behind all the negative news, however, a big trade is setting up. QCOM stock last spent an extended amount of time around the $50 mark in early 2016. It went on to return 40% within a few months. Speculators’ rush to dump Qualcomm post-Broadcom merger going bust creates a similar opportunity.
The company is now guiding to $4.47-$5.22 of earnings for fiscal year 2019. Take the midpoint of that, and QCOM stock is just north of 10x forward earnings. Using adjusted GAAP earnings estimates of $6.75 to $7.50 for 2019, the stock is well into the single digits on a forward PE basis.
On top of that, the company presents a model for what would happen if they engage in a major share repurchase (presumably if the NXPI deal gets shot down). That outcome shows a $1.26 boost to GAAP earnings and a stunning $1.50 boost to non-GAAP earnings. Combine Qualcomm’s massive cash hoard with a cheap stock price, and a buyback can do amazing things for its earnings.
QCOM: Great For Growth & Income Investors
QCOM stock now offers one of, if not the largest yield in the mega-cap tech stock space. With its recent stock price decline, QCOM stock moved above a 4% dividend yield. Adding to that, Qualcomm management recently hiked the dividend from 57 cents per quarter to 62 cents. This 9% hike to the dividend now has the dividend yield up to 4.6%.
That’s already an explosive yield for a tech company. And if the NXP deal fails, things will get even more crazy. Over the past 10 years, Qualcomm has returned more than $50 billion to its shareholders via dividends and stock buybacks. And now, the company is planning, if no merger occurs, to buy back $20 to $30 billion more of QCOM stock.
That would account for 27-40% of all outstanding Qualcomm stock. Retire such a huge number of shares, and it paves the way for gigantic shareholder returns in coming years.
The next couple quarters may not be easy for QCOM stock. We’re going to hear more negative headlines, and analysts are likely to stay cautious. But don’t lose sight of the bigger picture. The company is still producing huge earnings, and they’re distributing a large portion of them back to their shareholders.
At the time of this writing, the author owned QCOM stock. You can reach him on Twitter at @irbezek.
