Qualcomm Q3 Earnings & Apple Dispute: QCOM Analysis

This article analyzes Qualcomm stock in the context of the company's most recent earnings report and legal dispute with Apple and other smartphone contractors.

For the third quarter ending June 25, 2017, Qualcomm (QCOM) handily exceeded analyst expectations despite its continued legal concerns with smartphone manufacturers and other contractors involved in the smartphone supply chain. According to the company's third quarter earnings release, revenues came in at $5.3 billion-- over analysts' revenue estimates of $5.26 billion. Similarly, Qualcomm reported third quarter EPS (Non-GAAP) of .83 per share-- slightly over analysts' EPS estimates of .81 per share.

However, on a year-over-year (yoy) basis, Qualcomm's revenues declined 12%.

Legal Battles Over Royalties Weigh on Operating Performance

The primary cause of Qualcomm's yoy revenue decline stems from ongoing litigations between it and Apple Inc. (AAPL). The lawsuit and subsequent counter-lawsuit began back in January, when Apple initially sued Qualcomm for $1 billion.

The tension between the two companies seems to be growing: the Wall Street Journal reported earlier today that other Apple suppliers have jumped into the conflict to attempt to help Apple. Of course, Qualcomm cites this as proof that Apple is the company attempting extortion, not Qualcomm. In a conference call with investors and analysts, Qualcomm's President, Derek Aberle, stated, "Apple teaming up with its contract manufacturers proves Qualcomm's case."

Meanwhile Qualcomm's CEO released the following statement regarding the company's lawsuit case against Apple:

We delivered better than expected results in our semiconductor business this quarter, which drove EPS above the midpoint of our expectations versus our April updated guidance... We believe that we hold the high ground with regard to the dispute with Apple, and we have initiated new actions to protect the well-established value of our technologies. Steve Mollenkopf, Qualcomm CEO

Qualcomm Stock Rating & Outlook

Despite the general volatility of Qualcomm stock due to uncertainty surrounding the outcome of the company's legal battle with Apple, we believe Qualcomm stock is an excellent long-term investment. Using a midpoint for the company's GAAP EPS estimate for fourth quarter of 2017, Qualcomm's total 2017 GAAP EPS would be $2.14. Given the $56 current price per share of Qualcomm stock, the company trades at a P/E ratio of 26.17 using the most conservative accounting methods for diluted net income.

Furthermore, the company's significant non-recurring expenses (related to Blackberry arbitration and Korea Free Trade Commission fines) from this year are taken into account, of which there were $1.9 billion, it becomes readily apparent that Qualcomm's underlying business economics are improving. That does not include the estimated $1 billion in additional revenues the company is fighting Apple to pay.

For value investors, Qualcomm stock should appear attractive given its temporarily depressed earnings. In addition, the stock pays a 4%+ annual dividend yield to its shareholders. The general expectation seems to be that this will continue to increase after the company's current litigation settles. Therefore, we will be adding Qualcomm stock to our List of Bullish Opinions due to the long-term prospects of the company.

In terms of technical analysis and momentum indicators, the price action is mildly bullish on a relative basis to the longer-term technicals. While the stock is certainly not in a "great setup" at this point in time, tomorrow's price action will determine whether Qaulcomm stock will be a popular short-term play.

Qualcomm Stock
Qualcomm Stock: Short-term Technicals

Eric Bruin

Eric Bruin

Founder. Kelley School of Business '17. Write about stocks and business news. Contact for business inquiries or to write articles for The Stock Trader Blog.

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