The San Diego-based mobile chip company splashed out stock to its team after winning a big settlement on their patent claims, including $3.5 million to CEO Steve Mollenkopf, who led the legal battle.
Compared with the windfall given shareholders, this was less than a penny tip on a $100 meal. Since the settlement was announced in mid-April, shares were up 52%, adding over $36 billion to the market cap.
The question for investors, as the stock opened May 21 at about $79 per share, was whether the celebration might have been overdone.
A look at the company’s fiscal second quarter, announced May 1, indicated it might have been. Revenues were down from the previous year, at $5 billion against $5.2 billion. Net income of $700 million, 57 cents per share fully diluted, were more than twice the previous year, but less than the $1.1 billion, 87 cents per share, achieved in the first quarter.
The windfall, management said, would come to $4.5 billion-$4.7 billion in the current quarter, about $3.77 per share. Analysts who had confidently raised their price targets were left singing the old Peggy Lee hit, “Is That All There Is?”
Third-quarter guidance wasn’t impressive, and bulls were left hoping that an end to the China trade war might become the next earnings catalyst, sending the shares to $100. Tomorrow may belong to Qualcomm, with earnings estimates as high as $6.37 per share for 2021, but tomorrow looks far away.
Tell Us More About Apple
CEO Mollenkopf also focused on the middle distance during his talk with analysts after the earnings. The Apple deal is for 6 years, he said. The roll-out of “5G” technology, on which Qualcomm controls patent rights, is just starting.
Imagine what 5G will do in China, “the largest mobile base in the world,” he added. Since then, the stock has gone almost nowhere, perhaps because the U.S. relationship with China is going nowhere.
Tell us more about the Apple settlement, the bulls are saying. OK, Mollenkopf said. The Apple settlement will be worth $2 per share this year, but the big money comes in 2021, in the form of 5G chipsets based on Snapdragon designs.
The final Apple settlement, while welcome, looks to have been based on yet-another failure by Intel (NASDAQ:INTC), the New York Knicks of technology, to deliver a workable design. Apple had to give Qualcomm what it wanted or it would lose market share to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) Android as 5G came on-stream.
Analysts who hadn’t bet on the Apple settlement before it happened decided that it had delivered all it could to the stock and took a pass.
The Bottom Line
Whether you should take a pass depends on your investment time horizon.
The 5G era will come, and Qualcomm will dominate it, providing an enormous boost to revenue and earnings over the next five years. If you can stand a bumpy ride, riding out tweetstorms and a slowdown in the smartphone market, that $6.37 per share in 2021 earnings would be a forward price to earnings multiple of 11.6 at Qualcomm’s May 21 price. After all, the current dividend of $2.48 per year is a yield of 2.88%, and it should be rising now that the skies ahead are clear.
If you can’t wait around five years for a stock to come good, walk away. The party’s over. Time for Qualcomm to go back to work.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.