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Buy Qualcomm (QCOM) Stock Ahead of Q3 Earnings?

Christopher Vargas

Qualcomm QCOM is expected to report its third quarter earnings Wednesday after the closing bell. The company has had a strong year compared to its industry average, up 31.4%. In April, the company announced an end to its bitter legal battle with Apple AAPL, catapulting the stock out of its sluggish start to the year. The company’s better than expected earnings report for the second quarter also supplemented the company in the first half of 2019. Is another earnings beat in the cards for Qualcomm? Let’s examine the company through the lens of our Zacks estimates and see what’s in store for the company this earnings season.

Overview

Qualcomm designs, manufactures, and markets digital wireless telecom products and services based on Code Division Multiple Access technology. Some of the company’s products include: CDMA-based integrated circuits, system software for wireless voice and data communications, and global positioning systems (GPS). QCOM’s business is organized into two reporting segments, Qualcomm CDMA Technologies and Qualcomm Technology Licensing.

The QCT sector reports operating results for sales of the integrated circuit devices (chips), system software for wireless voice and data communications, and global positioning systems (GPS). Integrated circuit products are used mainly in mobile phones, wireless data access cards, and infrastructure equipment. The Qualcomm Technology Licensing segment reports revenues received from licenses to the intellectual property portfolio. QTL also generates revenues from license fees as well as royalties based on global sales by licenses of products incorporating or using QCOM’s intellectual property.

Q2 Recap and Q3 Outlook

In Q2 2019, QCOM’s revenue fell 5% to $5 billion and reported a bottom line of $0.77 per share. The company’s reported revenue and EPS beat estimates by 3.7% and 8.5%, respectively. QCOM’s net income skyrocketed 101% to $0.7 billion in Q3 2019. The company’s QCT segment reeled in $3.72 billion for a decline of 4%; MSM chip shipments fell 17% with 155 million. Qualcomm’s QTL sector declined 8% to $1.12 billion but beat our estimates by 10.98% in Q2 2019.

Looking ahead to Q3, year over year estimates are projecting for earnings to drop 24.75% to $0.76 and sales to sink 8.7% to $5.11 billion. Estimate revisions have not ticked favorably for QCOM as they have been revised down with 100% agreement in the last 60 days. Key Company Metric estimates are calling for the QCT segment to dip 7% to $3.8 billion. The QTL sector is estimated to reel in $1.28 billion for a 12.95% drop. Furthermore, the shipment of MSM chips are forecasted to plunge 19.6% to 160 million.

Bottom Line

Qualcomm’s settlement with Apple involved the iPhone maker paying Qualcomm between $4.5-$4.7 billion. The settlement also includes a six-year license agreement along with a two-year extension option and a multi-year chipset supply agreement. While Qualcomm beat estimates in Q2, the company still reported declining revenues from Q2 2018. Estimates are projecting for the company to continue its year over year struggles in Q3. Qualcomm is currently sitting at a Zacks Rank #4 (Sell). Aggressive competition in the mobile phone chipset market continues to bother QCOM. In addition, margins have fallen sharply over the years due to high operating expenses and R&D costs.

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