Qualcomm, Inc. (NASDAQ:QCOM) raised brows after releasing first-quarter earnings for fiscal year 2015. But the real eye-opener ensued when QCOM simultaneously guided down, forecasting lower-than-expected earnings that would land revenues of between $26 billion and $28 billion, down from an estimated $26.8 billion and $28.8 billion. Subsequently, Qualcomm stock plummeted during after-hours trading, falling more than 10% as the week came to a dismal close.
Although a percentage of shareholders panicked, others watched through bullish eyes, seeing an opportunity to buy Qualcomm stock on the dip.
The question is, are the headwinds that have driven QCOM back just short-term obstacles, or long-term problems? Let’s take a look.
Headwinds for QCOM
First, a quick look at some of the most recent pressing issues for Qualcomm:
- Rumors circulated that the QCOM Snapdragon 810 chip would not be employed in the next generation of Samsung Galaxy phones due to an overheating issue.
- Stiff competition from competitors such as Intel Corporation (NASDAQ:INTC), Media Tek Inc and Marvell Technology Group Ltd. (NASDAQ:MRVL), along with increased 4G competition in China, has reduced QCOM tech licensing margins by a rough “200 basis points year-over-year”, according to Capital Market Analyst, Christopher Rolland.
- Qualcomm’s ongoing investigation conducted by the Chinese government concerning anti-competitive practices.
The last matter has been haunting QCOM for some time, but finally resolved with Qualcomm agreeing to a $975 million fine, lowered royalty rates, and moderations to their licensing policy.
While that nearly $1 billion penalty sounds big, it actually proved to be a sign of relief and sent Qualcomm stock higher on the news. The thought is, QCOM stock holders are just glad a conclusion has been reached, putting an end to the unpredictable nightmare and bolstering shares.
And in regards to QCOM losing a major customer, the media might have blown this unfortunate news out of proportion.
Qualcomm did eventually address this issue, adjusting its full-year revenue guidance down $800 million. Said CEO Steve Mollenkopf:
“Looking ahead, we have lowered our revenue outlook for our semiconductor business for the second half of the fiscal year and lowered our EPS expectations. These changes reflect our revised expectations related to OEM mix, sales to a large customer and heightened competition in China.”
According to Bob Ciura over at Seeking Alpha, this is not as catastrophic as it might seem at first blush:
“Assuming a 60% gross margin, the impact of losing Samsung on Qualcomm’s earnings per share would be roughly $0.15-$0.20 per share. This is disappointing, but hardly a disaster.”
Bottom Line
Although QCOM still has to deal with competition weighing on margins, investors should recognize Qualcomm stock as a buying opportunity in terms of long-term shareholder value. QCOM still generates a large amount of cash flow, and meanwhile it pays a Treasury-beating 2.5% dividend yield on current prices.
Qualcomm should eventually overcome these short-term obstacles. Buy QCOM at will.
As of this writing, Anna Rider did not hold a position in any of the aforementioned securities.
