Earnings season is peaking with 75% of public US equities being done with June quarter earnings by the end of this week. Semiconductors have fared well in the markets with the SOX semi index SOXX appreciating 5.2% in the past 2 weeks. These returns will be tested as Qualcomm QCOM, one of the biggest names in the sector, prepares to release earnings this evening.
Qualcomm analyst estimated a $0.76 EPS, which would represent a 25% decline from the prior year. Investors will be looking for sales of $5.11 billion, which would demonstrate an 8.7% year-over-year drop.
Sell-side analysts have been revising EPS estimates downward over the past few months due to the FTC’s ruling that Qualcomm was violating antitrust laws. QCOM has been pushed down to a Zacks Rank #4 (Sell).
Judge Lucy Koh made the stock plummeting verdict on May 22nd, claiming that Qualcomm is participating in unfair practices involving its patent licensing. If the ruling stands, the firm will be forced to renegotiate licensing terms that would be considerably less profitable.
This is following a sweeping win by Qualcomm over a dispute with Apple AAPL regarding chip royalties. Apple settled the suit by agreeing to pay Qualcomm pay between $5-$6 billion in additional licensing fees in order to gain access to the firms 5G smartphone chips. Apple is now in talks with Intel INTC to buy their 5G chip business and cut Qualcomm entirely out of the equation.
Qualcomm’s patents are its most substantial income driving assets. Licensing makes up a majority of the company’s operating profits. Disrupting this business segment would significantly impact the firm’s profitability.
Qualcomm has agreements on the verge of expiration and will be forced to renegotiate them under the FTC’s terms if they are unable to get the ruling reversed. Some of the rulings adverse effects may be seen in this evening’s earnings release.
Recent Performance & Valuation
Despite the FTC ruling and China trade headwinds, QCOM has managed to rally 12.8% in 2019 thus far. These gains are still substantially below the sector with the SOX index demonstrating over 37% returns.
QUALCOMM Incorporated Price and Consensus
QUALCOMM Incorporated price-consensus-chart | QUALCOMM Incorporated Quote
QCOM is being valued at 19.3x P/E, on the highest end of its 5-year P/E trend, which ranged from 10x to 22x.
Qualcomm is funded primarily by debt with 80% of its capital being made up by debt. This causes the stock to be highly cyclical and volatile. QCOM holds a beta of 1.63.
Qualcomm is treading on dubious water with the FTC ruling threatening to upend its business model. Earnings after the bell today should shed light on the impact that this ruling will have on the business moving forward if they are unable to reverse it. I believe that this stock has more room to fall with the full burden of the FTC’s verdict not being fully priced into the stock yet.
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