Qualcomm Earnings Still Threatened by FTC Ruling

DoJ ruling could halt FTC judgement, but risks remain

Qualcomm (NASDAQ:QCOM) stock has its share of challenges.

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The mobile chip maker saw a nice pop in mid-April, with shares rising from about $57 up to as high as $90 after settling its litigation with Apple (NASDAQ:AAPL). But concerns with a Federal Trade Commission (FTC) antitrust ruling have pushed the stock down to the $65-$75 price level.

With government rulings threatening the company’s competitive advantage, what is the next move for Qualcomm stock?

Read on to see why QCOM stock is a hold:

Good News and Bad News for QCOM

The April Apple settlement boosted Qualcomm stock. After years of an ugly patent dispute, Apple settled, agreeing to pay Qualcomm between $4.5 billion and $4.7 billion and start a six-year licensing agreement.

This good news helped push QCOM stock to new highs. Unfortunately, it was chased with a heavy dose of bad news.

In May, Qualcomm stock tumbled after a ruling from the FTC. The FTC found that the company was engaging in unfair trade practices, exploiting its size to keep out competition and squeeze cell phone manufacturers. Qualcomm was ordered to license its technology to rival chip makers, negatively impacting the company’s “edge.”

But Qualcomm has received a reprieve: the U.S. Department of Justice (DoJ) has asked the appeals cause to pause the antitrust ruling. The DoJ cited “Qualcomm’s critical role in 5G technology in the short-term” as the rationale behind their decision.

Does this mean QCOM is out of the woods? Maybe, maybe not. While the DoJ and other agencies believe Qualcomm’s market power to be in the national interest, it is clear that QCOM’s days of high margin licensing could be over.

Without high margins, it becomes tougher to justify Qualcomm’s valuation. With nonexistent growth, investors need a reason to keep bidding up QCOM shares.

Qualcomm Earnings: Where is the Growth?

QCOM last announced earnings on May 1st. For the quarter ending March 31, 2019, sales were down 5% year-over-year (YoY), primarily due to declines in the company’s QTL licensing segment (down 8% YoY).

Non-GAAP EPS for Q2 FY19 was 77 cents a share, about the same (78 cents) as in Q2 FY18.

The company’s aggressive share buyback program has been a factor in maintaining EPS. Qualcomm bought back $22.6 billion worth of shares in FY18, and has already bought back $1.02 billion in FY19. The company has $7.8 billion remaining under their current stock repurchase program.

Qualcomm has also been able to maintain EPS via cost cutting. As discussed in the last 10-Q, QCOM successfully reduced annual operating costs by $1 billion.

But to move the needle, Qualcomm needs organic growth. While the adoption of 5G is a solid future catalyst, it could be years before the new technology reaches critical mass. Qualcomm’s investor communications speak little of “game-changers” in the pipeline.

However, even with a lack of a growth story, Qualcomm does not trade at a discount. Let’s take a look at its earnings multiples relative to peers:

QCOM Stock Fairly Valued

Compared to its peers in the semiconductor space, Qualcomm’s valuation seems reasonable. QCOM stock trades at 15 times forward earnings, and has a EV/EBITDA ratio of 14.9.

Here are the earnings multiple metrics for Qualcomm’s peers:

Intel (NASDAQ:INTC): 11x forward earnings, EV/EBITDA of 7.3

Texas Instruments (NASDAQ:TXN): 20.6x forward earnings, EV/EBITDA of 15.4

Broadcom (NASDAQ:AVGO): 12x forward earnings, EV/EBITDA of 14.2

With Qualcomm stock trading at EBITDA multiples similar to AVGO and TXN, it is hard to make a value case for QCOM. Until a solid discount to peers emerges, it is tough to find a compelling reason to enter the stock.

Bottom Line: Avoid QCOM Stock

For investors looking to enter Qualcomm today, the stock is not a buy. Despite the reprieve from the DoJ, Qualcomm’s competitive advantage is materially impacted by the FTC decision.

If the high operating margins of licensing are impacted, it becomes tougher to justify QCOM stock’s current valuation. QCOM could be a buy if it starts trading at a discount to TXN and AVGO, but for the time being the stock appears fairly valued relative to its peers.

On the other hand, QCOM could be attractive to dividend investors. As InvestorPlace contributor Brad Kenagy pointed out, QCOM offers a fairly high dividend yield (3.3%). Coupled with the company’s buyback strategy, QCOM shareholders could see benefit even if the share price treads water.

The next big move in QCOM stock will likely come from the company’s earnings announcement on July 31st. Excluding the one-time item from the Apple agreement, QCOM projects quarterly non-GAAP diluted EPS to be between 70 cents and 80 cents per share, down 20-30% YoY.

If QCOM exceeds expectations, shares could see a bump. But given they are not out of the woods regarding the antitrust decision, additional upside remains limited.

Investors should take all of these factors into consideration before initiating a position in Qualcomm stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/qcom-stock-threatened-ftc-ruling/.

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