Qualcomm (NASDAQ:QCOM) stock dropped again after reporting results that were short of estimates, posting on a non-GAAP basis net income of $1.2 billion, 81 cents per share, on revenue of $5.6 billion for the quarter ending in June. But QCOM stock watchers called the company’s guidance “disappointing” because it stripped out its business with China’s Huawei from the results.
The numbers, however, have little to do with Qualcomm’s business and more to do with its status as a legal and political pinata.
Qualcomm for America
As I wrote on July 22, Qualcomm’s legal claim linking patents to chip sales is now fully supported by the Trump administration, despite negative reaction from a court.
Three agencies — the Departments of Energy, Justice and Defense — are now on the record arguing that legal action against the monopoly threatens national security.
The decision by U.S. District Court Judge Lucy Koh, an Obama appointee, calling Qualcomm’s “no patent, no chips” practice illegal, continues to be fought by the administration, with letters to the Ninth Circuit Court of Appeals asking for a stay of the decision.
Qualcomm for China
Despite administration rhetoric calling Qualcomm a bulwark against China’s tech ambitions, Qualcomm continues to do business there. If anything, it’s even more deeply involved with the world’s second-biggest economy than ever before.
Qualcomm recently signed a deal with Tencent Holdings (OTCMKTS:TCEHY) to collaborate on digital entertainment. This could result in the two companies jointly developing a mobile gaming device or smartphone. That’s important as gaming shifts to online and mobile platforms, where Tencent is a clear leader.
Qualcomm is also working with China to make 5G the standard communication system for self-driving cars. NXPI (NASDAQ:NXPI), which Qualcomm tried to buy last year, is behind a rival standard based on WiFi. A win for Qualcomm here could bring tens of billions of dollars in royalty payments down the road.
The Legal Discount
How well Qualcomm’s doing depends a lot on whether you use GAAP or non-GAAP measurements.
The former, which counts cash in escrow under legal dispute as income, shows the company earning $2.1 billion, or $1.75 per share of QCOM stock fully diluted, on revenue of $9.6 billion during the most recent quarter. Under non-GAAP accounting Qualcomm said it will earn just 65 cents-75 cents per share next quarter on $4.2-5.1 billion of revenue.
In its latest report the company estimated it will get $4.7 billion from the settlement of its dispute with Apple (NASDAQ:AAPL), and those revenues are included in its GAAP calculations. Apple recently bought most of Intel’s (NASDAQ:INTC) smartphone modem business for $1.2 billion, and plans to eventually replace Qualcomm modems with its own.
Qualcomm CEO Steve Mollenkopf also said his company has yet to reach a final agreement with Huawei, so its outlook doesn’t include those payments. He said Chinese carriers won’t start launching 5G services until next year, eliminating a normal seasonal earnings boost. He predicted they will start seeing the full benefits of 5G in the first quarter of 2020.
Bottom Line on QCOM Stock
The uncertainty over China and its legal status means QCOM stock continues to be range-bound. Many analysts don’t know what to think. What presents as a tech stock is trading like a law firm.
The result is a bargain for income-oriented investors. Qualcomm easily out-earns its dividend and continues to accumulate cash. It also has more than $14 billion in cash and marketable securities on its books, meaning 34% of its assets are liquid. With older investors increasingly desperate for yield, this looks like an opportunity.
For other investors, it looks like a speculation.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL.