QCOM’s Future Will Not Be Revealed With Tomorrow’s Earnings

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When stock markets weaken traders tend to punish the stocks with the most uncertainty first. As such, Qualcomm (NASDAQ: QCOM) is bearing the brunt of selling for two reasons. On a macro level, semiconductor stocks face a near-term business slowdown. At the company level, QCOM’s spat with Apple Inc. (NASDAQ:AAPL) puts its IP royalty revenue model in question.

qualcomm stock

Right now, Qualcomm stock works a dividend play for income investors. With a dividend yield of 4.9%, QCOM generates more income for investors than Intel (NASDAQ: INTC) — considered the safest chip stock play. Intel stock pays a dividend yielding 2.57%. And Nvidia (NASDAQ: NVDA) is not an income play at all with a dividend yielding 0.46% — and that’s after NVDA fell a whopping 13.8% on Monday.

Qualcomm’s Ongoing Legal Troubles

But QCOM stock could fall further. Right now, Qualcomm is in the middle of a court battle with the FTC. The FTC claims Qualcomm hurts competition by imposing unfair terms and has what amounts to a monopoly on the mobile chip market. At the trial, an FTC witness criticized the chip giant’s economics experts as sloppy.

If the court sides with the FTC, it would put Qualcomm’s royalty revenue model in question. Customers would pay less for QCOM’s intellectual properties. However, with these risks, the market is not pricing in Qualcomm collecting royalties that Apple or Chinese suppliers already owe.

An FTC win in the courts will have broad implications in the tech sector. The IP royalty model that many technology firms rely on for survival will no longer be valid. BlackBerry (NYSE: BB) still has valuable IP related to the mobile market. IBM (NYSE: IBM) prides itself on its IP acquisitions. Nokia (NYSE: NOK) and Ericsson (NASDAQ: ERIC) also rely on royalty revenue to offset its mediocre growth.

Qualcomm’s Upcoming Quarterly Earnings Report

Despite the fact that closing arguments for the FTC trial will come this afternoon, earnings must go on. Qualcomm is scheduled to report quarterly earnings on January 30 after the close.

QCOM will probably meet analyst estimates. But expect its outlook for next quarter to have a cautious tone. Smartphone manufacturers have already warned the markets that sales will continue to weaken for at least another quarter.

Qualcomm may give investors a rosier outlook when it comes to its 5G developments. Telecoms are already planning to launch, to a limited degree, the faster wireless technology in the second half of this year. 5G revenues should offset the lack of royalty revenues.

Realistically, the introduction of 5G this year will not add meaningfully to revenue in 2019, but next year could be different. As telecoms and phone manufacturers embrace the technology, QCOM investors will benefit.

Soon, however, the courts will have ruled on Apple vs. Qualcomm. And markets are not expecting Qualcomm to get any owed IP royalties from Apple. Any ruling that recognizes that Apple is wrong in holding back royalty payments after agreeing contractually to pay will only help QCOM stock.

But the courts could also side with the FTC and shake up the mobile market. Lower royalty rates would mean higher profits for companies like Apple, but would be bad for Qualcomm.

The Bottom Line on QCOM Stock

17 analysts offering a 1-year price target on Qualcomm have an average price target of $67, implying that shares have 32% upside. 8 rank the stock a “buy” and 9 call it a “hold.” Of the 9 Finbox.io models used, the average fair value is $58, implying an upside of 15%.

Earnings are tomorrow, but the real signal for QCOM’s future will come from the conclusion of its case with the FTC.

As of this writing, the author holds a position in Nokia stock.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/qcom-future-revealed-tomorrow-earnings-simg/.

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