Qualcomm’s Q4 Earnings Must Show Some Success After Too Many Failures

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* Reports Wednesday, November 7, after the market closes
* Revenue Expectation: $5.53 B
* EPS: $0.82

One of the world’s largest chipmakers, Qualcomm (NASDAQ:QCOM), has been on the defensive for almost five years now, after a string of failures—some very recently—have pressured the company’s shares. That makes today’s Q4 2018 report even more crucial; it’s time for Qualcomm to finally show it can deliver on its financial goals.

Within just the past year Qualcomm has endured a variety of misses, beginning with the $120 billion, hostile takeover attempt by rival Broadcom (NASDAQ:AVGO). That was ultimately blocked by U.S. President Donald Trump in March.

Adding to the company’s misfires in 2018: the collapse, in July, of its $44 billion effort to acquire NXP Semiconductors (NASDAQ:NXPI), after Qualcomm was denied Chinese regulatory approval for the deal.

As well, Qualcomm has so far been unable to resolve a longstanding patent dispute with global smartphone giants Apple Inc. (NASDAQ:AAPL) and Huawei Technology Co Ltd (SZ:002502). After exhausting most of its growth options, there is a little left to drive bullish sentiment on Qualcomm shares.

Qualcomm's Q4 Earnings Must Show Some Success After Too Many Failures

QCOM Weekly 2015-2018

Indeed, the company’s stock has been a massive underperformer during the past five years, largely missing out on the rally that pushed competitors’ shares through the roof. While the Philadelphia Semiconductor Index, the industry benchmark, surged 141% during the past five years, Qualcomm shares fell 12% over the same period, closing at that $63.63 on Tuesday.

Losing Apple, Slowing Demand

We don’t see a quick reversal in Qualcomm fortunes ahead. The company is losing business from Apple, one of the world’s largest smartphone makers, as both companies remain embroiled in a lengthy legal battle. Qualcomm’s Chief Financial Officer George Davis in July said Apple likely won’t use the company’s cellular modems in the next generation of iPhones, and Qualcomm wasn’t including any revenue from Apple in its forecasts.

The other challenge for Qualcomm, as well as other semiconductor producers in general, is that in the current cycle, chip demand has peaked, with slowing smartphone sales and a sustained crash in cryptocurrencies. That industry-wide slowdown is unlikely to spark any interest from investors, even if Qualcomm beats on expectations when it releases its fourth quarter earnings on Wednesday.

In the long-run, the company is a major player in the next-generation wireless technology arena, more familiarly known as 5G. But there’s little clarity as to when the company will begin shipments and how long it will take for the 5G segment to become a major contributor to Qualcomm’s revenue, something that it urgently needs in order to diversify quickly.

Analyst consensus expects the San Diego, California-based semiconductor manufacturer to show an 11% slide in earnings per share from a year ago, to $0.82. Sales are expected to have declined 7% to $5.53 billion.

Qualcomm’s financial targets include a sharp increase in earnings per share. The company is targeting $6.75-$7.50 in fiscal 2019, compared with $4.28 in fiscal 2017, its last full year of reporting. We believe that’s too ambitious, unless the company resolves its licensing disputes and figures out ways to diversifiy it revenue.

Bottom Line

Despite the weak demand outlook and ongoing legal disputes, we don’t see a collapse in Qualcomm shares. After the failure of its NXP deal, the company launched a massive $30-billion stock buyback program to compensate investors. The increased buybacks and Qualcomm’s attractive 4% dividend yield will support shares, though they will likely stay at current levels.

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