Qualcomm (NASDAQ:QCOM) is not a near-term story. The key drivers for Qualcomm stock are 5G wireless, which likely won’t arrive in force until next year at the earliest, and the impact of the company’s settlement with Apple (NASDAQ:AAPL), revenue from which should take a few quarters to normalize.
Combined, those two factors should drive strong growth. As I detailed early last month, Qualcomm’s own targets suggest a steady increase in adjusted earnings per share from $3.54 in fiscal 2019 to $6 or more in FY22.
The question is to what extent that growth is priced in. I argued even those targets suggested a somewhat minimal upside from a price then at $80. On this site, Luke Lango took a similar tack last week. A week earlier, Ian Cooper saw 5G as pushing Qualcomm stock to over $100 this year.
That debate is what makes a market, and it will define the trading in QCOM for much of this year. That, in turn, makes fiscal first-quarter earnings (due on Feb. 5) rather interesting.
Soft Earnings Expectations
Fiscal first-quarter results seem unlikely to settle the debate when it comes to Qualcomm stock, at least assuming the numbers are roughly in line with expectations. Wall Street, anyway, isn’t expecting much.
The consensus revenue estimate of $4.83 billion suggests a modest decline year-over-year. Adjusted earnings per share are expected to decline by more than 25% year-over-year.
Those soft expectations aren’t a surprise. Most notably, Apple revenue still hasn’t returned in full, and the loss of that revenue is hitting margins. That aside, the 5G iPhone almost certainly won’t arrive until the end of this year at the earliest.
And so Q1 results aren’t going to show Qualcomm’s future potential. The company almost certainly will report a decline in earnings year-over-year — but that doesn’t mean it’s a business that is declining for good. Rather, for reasons mostly beyond its control, Qualcomm is in a bit of a soft patch. Even bears believe that will end at some point in the not-too-distant future.
The Battle over Qualcomm Stock
Put another way, next week’s earnings are unlikely to do much to settle the debate over Qualcomm stock. Bulls still are going to put their stock in 5G and other drivers.
Qualcomm, for instance, this month debuted a new computing system for autonomous vehicles. That could further diversify the business away from smartphones and make the company a competitor to the likes of Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA).
Valuation, meanwhile, is somewhat high looking at fiscal 2020 expectations — but a sub-15x multiple to FY22 profits is not unreasonable. A dividend yield of 2.8% helps the case as well.
Skeptics, however, again will argue that much of the good news is priced in. Apple revenue will normalize in the near term, but that company is developing its own chips after acquiring assets from Intel. Smartphone unit demand may turn negative as replacement cycles lengthen. Regulators have targeted Qualcomm worldwide and may not be done.
In that context, 15x 2022 earnings is not particularly attractive. Broadcom (NASDAQ:AVGO) is cheaper on a forward basis. So is Intel. To convince the bears, Qualcomm likely needs more than 5G. It won’t be able to deliver that any time soon.
Watch Next Week’s Trading
Of course, that doesn’t mean the bulls are wrong. And that’s what makes trading in QCOM stock into, and out of, earnings rather interesting.
After all, even a quarter that beats — or misses — Street expectations doesn’t necessarily change the long-term story here. Timing, whether of Apple revenue or 5G revenue, could easily drive a surprise.
And so the trading in Qualcomm stock after the quarter might simply reflect whether the stock sees new money — or has old money take profits. That, in turn, could set the tone for QCOM stock for the rest of the year, no matter what the earnings report has in store.
As of this writing, Vince Martin has no positions in any securities mentioned.
