In most cases, a poor earnings report coupled with disastrous guidance usually brings only one result: sudden volatility. And that’s more or less what happened to semiconductor and technology firm Qualcomm (NASDAQ:QCOM). Following a disappointing showing for its fiscal third quarter, QCOM stock promptly gapped down the following session.
However, the overall loss wasn’t too terrible for what the print demonstrated. Prior to the Q3 report, analysts expected per-share profitability to hit 75 cents. QCOM delivered 80 cents, but that was about the only good news for Qualcomm stock. From there, the narrative soured considerably.
On the revenue front, consensus targeted $5.08 billion. Here, the tech firm noticeably fell short, ringing up only $4.89 billion, a nearly 4% negative surprise.
But the most critical headwind impacting QCOM stock was the guidance for Q4. Management sharply downgraded expectations for earnings per share, guiding a range between 65 cents to 75 cents. Additionally, they see a revenue haul between $4.3 billion to $5.1 billion. Previously, covering analysts expected EPS of $1.08 and top-line sales of $5.63 billion.
Naturally, China clouded the earnings narrative. Specifically for Qualcomm stock, management has incurred consequences from President Donald Trump’s administration blacklisting Huawei from receiving American tech products. As a result, Huawei has reinvigorated efforts into its home smartphone market.
Unfortunately for QCOM stock, that hurts the underlying organization because it mostly sells modems to Huawei’s Chinese competitors Xiaomi (OTCMKTS:XIACF) and Oppo (Huawei makes most of its modems in-house). Thus, Huawei taking market share from these two rivals represented a second-hand hit against Qualcomm stock.
And yet shares are only down a little more than 2% since Q3. Are the markets ignoring the China risk?
Wall Street Sees the Bigger Picture for QCOM Stock
I wouldn’t say that anybody is ignoring China’s impact. For instance, early last week, the Chinese government allowed their currency to drop below a key technical level. That sent a message to the United States that the Asian juggernaut is ready for an extended conflict.
And let’s not forget that QCOM has another headache with the Federal Trade Commission. A federal court recently ruled against Qualcomm in an antitrust case brought by the FTC. The federal agency sides with Apple (NASDAQ:AAPL), which claims unfair licensing practices.
With all this turbulence, you’d think QCOM stock would fall into the gutter. Yet I believe what’s supporting shares is that Wall Street sees the bigger picture behind the earnings disappointment. The silver lining here is that China has proven itself an unreliable and untrustworthy economic partner. QCOM and its peers will take the pain now in the hopes of a better tomorrow.
First, Huawei is also embroiled in a royalty dispute with Qualcomm. Simply, they’re not paying QCOM, which is hardly a surprise. We saw with the Micron Technology (NASDAQ:MU) espionage incident that China will sometimes go to great lengths to steal intellectual property.
This segues into my second point: It’s becoming clear that for Chinese companies, their nationalistic interests supersede their capitalistic motivations. For China, the solution is straightforward: swallow their pride, and agree to stop stealing intellectual property.
However, they won’t do that because they desperately want to progress their “Made in China 2025” protocol. And the quickest way to get there is to cheat.
Thus, the markets aren’t punishing QCOM stock for events that the tech firm has no control over.
Qualcomm Stock Has Trump Cards
The other reason that Wall Street isn’t severely punishing QCOM is that the company has a trump card; actually, it has two of them.
Obviously, the first trump card is the man himself. Love him or hate him, he’s the only American leader to put Chinese malfeasance on notice. Admittedly, his tactics involve zero diplomatic tact. He might even relish in his tough guy stance on China. Nevertheless, he’s developing a foundation for transparency that might have long-lasting positive effects.
The second trump card is our innovative prowess. In some ways, we should be flattered that the Chinese are stealing from American tech giants. Tacitly, it confirms that the Chinese are lagging in many areas and hope to fill the gap through theft.
Here, we have a critical advantage, and Trump’s policies will help us protect that lead. I agree with our own Jeff Remsburg, who urged readers not to panic on their semiconductor holdings. And better yet for QCOM stock, Qualcomm has a sizable advantage in 5G. There are plenty of reasons to still like QCOM, despite the drama.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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