Since hitting a 52-week high last month, Qualcomm (NASDAQ:QCOM) has lost some of its mojo. The stock has gone from $96 to $89 for a loss of about 7%.
But when looking at the past year, this looks more like noise. Keep in mind that during this period, the gain was a sizzling 78%. Of course, many other megatech operators like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) have also posted impressive returns.
Last week, Qualcomm did report its results for its fiscal first quarter. And on the surface, they looked fairly good. Revenues increased by 5% to $5.08 billion and the adjusted earnings came to 99 cents a share. Wall Street, on the other hand, was looking for revenues of $4.84 billion and profits of 85 cents.
In the quarter, QCOM did get a boost from its 5G technologies. This is certainly the main driver for growth and the company looks positioned to be a long-term beneficiary.
On the conference call, here’s what CEO Steve Mollenkopf had to say about this:
As we start the year, there are over 345 operators in nearly 120 countries, investing in 5G, including 45 operators in over 20 countries that have launched commercial 5G services, spanning both the sub-6 and millimeter wave spectrum. Looking forward, we continue to expect millimeter wave to be deployed in all regions. Additionally, more than 45 OEMs have launched or announced commercial 5G devices, many of which are using our Snapdragon 5G platforms.
On the product side, we recently introduced our flagship Snapdragon 865 mobile platform that we expect will power many premium tier Android smartphones this year. We also introduced the Snapdragon 765 and 765 Gaming Mobile platforms with an integrated 5G modem.
The Key Problem for Qualcomm Stock
Unfortunately, there were some nagging issues with the earnings report. First of all, QCOM disclosed that it is the subject of an antitrust investigation in Europe. The focus is on the company’s actions regarding its 5G-based band processors in the RF (radio frequency) market. European regulators are concerned that QCOM is illegally leveraging its market power to gain an advantage with 5G.
Granted, the company has a long history of dealing with litigation – and always seems to find ways to avoid major damage. So I would certainly discount the latest development.
However, in terms of the impact on QCOM stock, the main reason for the recent drop looks to be the guidance for the current quarter. The company is looking at earnings coming in at 85 cents to 95 cents a share, compared to the consensus forecast of 86 cents. As for revenues, they are expected to range from $4.9 billion to $5.7 billion. But Wall Street was forecasting $5.1 billion.
Why the softness? It looks like this is due to the coronavirus from China. On the earnings call, QCOM CFO Akash Palkhiwala said:
There is significant uncertainty around the impact from the coronavirus on handset demand and supply chain. Based on the information we have at this time, we are widening and reducing the low end of our guidance range. We remain in active contact with our employees, customers and suppliers as we continue to monitor the situation.
Bottom Line on QCOM
For the most part, the impact of the coronavirus is difficult to gauge. Unlike the situation with SARS in 2000 to 2003, China is now a much larger portion of the global economy. The country also gets much more of its growth from domestic demand.
But for QCOM, the company does look particularly vulnerable as about half its revenues come from the country. Besides, the valuation on the stock is a bit pricey, with the price-to-earnings ratio 25.5x. True, the valuations for tech companies are generally on the high side nowadays. But with QCOM stock, there seems to be more risk on the downside for now. And it could be tough to see gains, at least for the next couple quarters.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
