As with many other tech operators, Qualcomm (NASDAQ:QCOM) stock has pulled off a nice rally since late March. Yet the shares are still well off their highs. Consider that the price of Qualcomm stock is down 23% since January. Then again, only a few companies have been able to maintain positive returns for the year like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) amid the novel coronavirus pandemic.
Qualcomm reported its fiscal second quarter results last week, and they were fairly good.
The adjusted earnings came to 88 cents, up from 77 cents in the same period a year ago. Revenues also rose by 5% to $5.22 billion. Wall Street analysts, on the other hand, were forecasting earnings of 79 cents a share and revenues of $5.03 billion.
But of course, the current quarter will not be so robust because of the impact of the coronavirus. Qualcomm is expecting adjusted earnings of 60 cents to 80 cents a share and revenues of $4.4 billion to $5.2 billion. Analysts were forecasting 78 cents for earnings and $4.89 billion on the top line.
The wide gaps in the guidance are reasonable since it is extremely difficult to predict demand in the current environment. Yet the company is still one of the few that has not withdrawn its forecasts. This provides some degree of confidence, which is certainly positive for Qualcomm stock.
Now let’s take a look at some of the highlights for the quarter:
- Qualcomm announced new patent licensing arrangements with Oppo and Vivo, which are major handset companies in China. However, the company still has not been able to get an agreement with Huawei. But both parties are continuing with their negotiations. Keep in mind that Qualcomm has not received any royalties from Huawei for the past six months.
- All in all, Qualcomm has been able to transition effectively to a remote workforce. The company has also been able to minimize the disruption to the global supply and has established remote access labs to continue with the R&D efforts and testing.
- Qualcomm increased its quarterly dividend payout by 5% from 62 cents to 65 cents per share.
- The company announced original equipment manufacturer (OEM) deals for its Snapdragon 865 5G Mobile platform with a number of customers like Asus, Nubia, Samsung Electronics, Sony (NYSE:SNE) and Xiamoi.
The 5G Opportunity
When it comes to Qualcomm stock, the key is the 5G rollout. And it looks like things are doing quite well.
On the earnings call, CEO Steve Mollenkopf said: “However, we see no change in our calendar year 2020 5G smartphone forecast. As we look to the second half of calendar 2020, while there are a few regions with minor delays in 5G network deployments, overall 5G is progressing as planned and we continue to be well positioned to drive the rapid adoption of 5G globally.”
He also noted that the company has signed 85 5G licensing agreements, compared to 80 in the prior quarter.
But this really should not be a surprise. According to Cowen analyst Matthew Ramsay: “On the flip side, we believe carriers are heavily incentivized to drive contract upgrades, with Apple and Huawei (who remains in a dispute with Qualcomm) both launching high profile 5G products. Fundamentally, however, we see Qualcomm holding the premier modem technology to an industry on the cusp of its first major upgrade cycle in nearly a decade.”
He has a $100 price target on Qualcomm stock, which assumes 35% upside from current levels.
The Bottom Line on Qualcomm Stock
It’s true — the company will have some choppiness in the near-term. But it’s also encouraging that China has started to recover. More importantly, the long-term prospects for 5G are definitely promising and should provide for sustainable growth.
In the meantime, the dividend is at an attractive 3.4%, which is fairly high for a tech company, and the shares are at a more reasonable valuation, given the recent fall off. Overall, this means Qualcomm stock remains a good play on the 5G mega-trend.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
