Can Qualcomm Reverse Its Fate?

The chip manufacturing giant's revenue growth turned negative in the 3rd quarter

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Jul 21, 2017
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Qualcomm Inc. (QCOM, Financial) rewarded shareholders with healthy returns in 2016, but the stock has failed to find its way into green this year. The stock is down nearly 18% year to date and looks like it will not stop bleeding in the near term, keeping in mind the ongoing legal battles.

Despite those legal battles, the chip manufacturing giant’s long-term growth outlook remains intact, and the sharp fall in share price has created an excellent buying opportunity for shareholders. The company’s legal fights have taken a toll on its earnings which can be seen in its third-quarter results.

Qualcomm reported its third-quarter results on July 19. For the third quarter, the company logged earnings per share of 83 cents, surpassing the analysts' estimate by 2 cents. On the other hand, its revenue came in at $5.03 billion, again beating the consensus by $40 million. That figure, though, represents a drop of 12.1% year over year.

The company generated $1.2 billion in revenue from its technology licensing business, down 42% year over year and 48% quarter over quarter. Moreover, its EBIT margin came in at 73%, down 13 percentage points on an annual basis.

In the mobile segment, Qualcomm’s CDMA technologies (QCT) business continues growing at a healthy rate in the highly competitive China region and is performing well across all price gears. The company’s QCT operating segment generated approximately $4 billion in revenue in the third quarter, signifying 5% growth year over year.

Despite the 7% drop in mobile chip shipments, the company managed to report positive revenue growth which is impressive. The chip manufacturing giant’s Snapdragon 835 and Snapdragon 600 processors account for the top performers in the high-end smartphone market.

On the other hand, Qualcomm also is aggressively focusing on several other key growth areas such as 5G wireless services, ARM-based servers, and deep learning. The company detailed that the revenue generated from these hot-growth areas was up nearly 30% year over year.

It seems like the company is making a smart move by shifting its focus to other hot-growth areas and reducing its dependence on the smartphone market that is being crowded by cheap rivals.

In spite of its near-term issues, Qualcomm has many positives that the market may be overlooking. Most significant is its pending deal with NXP Semiconductors (NXPI, Financial). The deal has already received approval in the U.S., but the number of shares proposed to the deal has fallen recently and currently sits at 12.5%.

Although Qualcomm needs to gain approval in critical international markets such as South Korea, China and the EU, the company is dynamically managing the approval process in those areas. If Qualcomm successfully acquires NXP Semiconductors, the combined company revenue will be a technology as well as semiconductor leader with future yearly revenue likely to be over $30 billion. The company expects to close the deal by the end of this year.

The biggest risk in the case of Qualcomm is that if its deal to acquire NXP fails for any reason, it could hurt the stock badly, but it is not likely Qualcomm will let NXP Semiconductors slip by its hands very easily.

Moving ahead, the chip manufacturing giant’s guidance comprises no royalty revenue from Apple (AAPL, Financial) or the other license. For the next quarter, the company expects QTL revenue in the range of $1 billion to $1.3 billion, down 31% to 45% year over year.

According to a report from Bloomberg.com, Facebook (FB, Financial) is planning to launch its new and cheaper $200 Oculus Rift virtual reality (VR) headset later this year. Most significantly, Facebook said the new headset will not need to be tethered to a smartphone or PC. Moreover, Facebook also mentioned that Qualcomm's Snapdragon processor would power the new VR headset.

Facebook’s new VR headset will likely be comparable to Samsung’s (SSNLF, Financial) Gear VR, but less than its powerful Rift device which needs a high-end PC to function. While virtual reality is still in its infancy, Samsung’s Gear VR has become popular in a short span of time.

The virtual reality market is projected to grow at a robust rate, and the launch of a cheap and efficient VR device will help Facebook snatch a considerable market share from Samsung. This, in turn, will help Qualcomm to gain a strong lead in the high growth VR market.

Summing up

Although Qualcomm is facing several problems this year, its long-term outlook looks strong. The revenue from its QTL business continues moving downward at a substantial rate whereas its QCT business continues displaying strong signs of upward momentum.

After reporting positive revenue growth throughout the past four quarters, the company’s revenue growth turned negative in the most recent quarter. The company, though, has faced a similar kind of situation in the past and has successfully come up with superior results. The company is aggressively focusing on other growth areas which will indeed reap benefits in the future.

On the other hand, the chip manufacturing giant currently offers a stunning forward dividend yield of 4.22% which is highly impressive. Moreover, the stock also trades at a price-earnings (P/E) ratio of 18, less than the industry’s average. This suggests the stock is undervalued at current market price.

As a result, shareholders should consider buying the stock at current market price and continue to add on every dip as its future looks healthy.

Disclosure: No position in the stocks mentioned in this article.