Qualcomm Earnings Preview: Investors Counting On Sales Boost From 5G Technology
Investing.com | Nov 05, 2019 10:20
* Reports 4Q 2019 results on Wednesday, Nov. 6, after the market close
* Revenue Expectation: $4.75 billion
* EPS Expectation: $0.71
Qualcomm (NASDAQ:QCOM) stock has soared 30% since late May, having plunged more than 16% in the five months before that. This dramatic turnaround strongly suggests investors are optimistic about the chipmaker, hopeful it's seen the worst in the current down cycle and that the next phase will bring a rebound in demand. Whether the San Diego-based company delivers on these expectations is, however, not yet guaranteed.
For its fiscal fourth-quarter earnings report, scheduled to be released tomorrow, Chief Executive Officer Steve Mollenkopf has already warned of a drastic slowdown in sales, hurt by slowing demand from mobile-phone makers who are the company’s largest customers.
Phone makers are holding off on releasing new high-end phones based on current technology and consumers are delaying their purchases until the debut of fifth generation, or 5G, cellular services, Mollenkopf said in July, adding that this temporary lull will hurt the company’s near-term revenue outlook.
For the quarter that ended on Sept. 30, Qualcomm expects sales in the range of $4.3 billion to $5.1 billion. The forecast projects a decline in sales of 12% to 26% from the period a year earlier.
But the price action in Qualcomm’s shares during the past few months implies that investors are looking beyond the fourth-quarter and focusing on the positive developments that favor buying Qualcomm stock when it’s trading low. The shares rose 1.8% yesterday, to close at $85.09, having gained 3.5% during Friday's session.
Contributing in a big way to Qualcomm’s surge over the past few months, the resolution of several of the company's legal battles has brought significant relief to investors. In August, a court of appeals granted Qualcomm a reprieve from a lower-court’s earlier order that demanded the chip manufacturer redo its contracts globally, as well as change the way it licenses its intellectual property to competitors like China’s Huawei Technologies.
And before that win, Apple (NASDAQ:AAPL) also ended its two-year legal fight with Qualcomm, in a settlement over billions of dollars of technology licensing fees that had threatened the chipmaker’s future revenue. As part of the settlement, Apple also reached a multiyear agreement whereby Qualcomm will supply chips and license its technology to the iPhone maker in exchange for royalty payments.
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The removal of these obstacles has once again put Qualcomm ahead of the competition when it comes to providing chips designed for so-called fifth-generation, or 5G, technology. Qualcomm is the market leader in 5G, which will allow phones and tablets to download videos and music at a much faster speed than the current 4G LTE standard permits. It’s also being showcased by mobile companies as a major breakthrough that will be able to support a host of new devices and services, such as automated homes and driverless cars.
Signs that the U.S. and China are moving closer to resolving their trade conflict is another positive for the company. U.S. Commerce Secretary Wilbur Ross said this weekend that licenses for U.S. companies to do business with Chinese telecom giant Huawei Technologies will be coming shortly.
Qualcomm stopped doing business with Huawei in May, when the U.S. slapped a ban on shipments to the Chinese company, which accounted for about 3% of Qualcomm’s revenue before the ban.
Bottom Line
With the improving environment for chip companies and after some resolution of legal issues, investors’ enthusiasm for Qualcomm stock is well justified. But for the shares to sustain this rally, the company needs to deliver an improved outlook tomorrow for its next fiscal year, when 5G-related demand is expected to boost sales and profitability.
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