Is QUALCOMM, Inc. (QCOM) Stock A Good Buy Following Its Latest Earnings?

Qualcomm, Inc delivered mixed Q1 earnings amidst mounting legal troubles. Is it the right time to buy QCOM stock?

Is QUALCOMM, Inc. (QCOM) Stock A Good Buy Following Its Latest Earnings
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San Diego based Qualcomm, Inc. (NASDAQ:QCOM) reported its Q1 earnings on January 25th, delivering an earnings beat but missing revenue estimates. The largest smartphone chipmaker's last quarter was overshadowed by its legal disputes. The Street was expecting Qualcomm to report an EPS of $1.18 on revenue of $6.12B. The company reported EPS of $1.19 and revenues of $6B. The company reported a 21% increase in net income YoY but net income plunged 54% if the South Korea FTC fine is accounted for. Though Qualcomm missed the revenue estimates, the company had a revenue and EPS growth (YoY) of 4% and 23% respectively. Overall, the San Diego based company had a mixed quarter with respect to expectations.

Qualcomm's legal battle with one of its biggest clients, Apple Inc (NASDAQ:AAPL), has taken center stage with QCOM stock still down more than 15% (as of Friday close) since the news broke out. The situation got compounded with Apple filing a second lawsuit in China against Qualcomm recently. The earnings report of the chipmaker is lost in the background of these happenings. Given Qualcomm's long-term prospects, "Is this the right time to buy QCOM stock?" is an intriguing question. Let's take a closer look.

Qualcomm saw its QTL and EBT segments revenue grow by 13%YoY to $1.811B and 14% YoY to $1.532B, respectively. One more positive news for Qualcomm was that the company saw an 8% YoY growth in reported 3G/4G device shipments estimated to be in the range of 331M-335M. The company guided for Q2-2017 revenues in the range of $5.5B to $6.3B and an EPS range of $1.15 to $1.25. It's a wide range as the low end of the revenue forecast would mean a drop of 1% and the high end would mean a growth of 13%. Qualcomm looks set for a good run in 2017 if one discounts its legal troubles.

Are Qualcomm's Licensing Revenues At Risk?

One thing is for sure that the Apple-Qualcomm legal battle would be a long and nasty one with likely re-appeals. Though QCOM stock is yet to recover fully from the slide caused due to the Apple lawsuit news, things are not as bad for Qualcomm as they appeared initially. Qualcomm's licensing revenues from Apple are safe in short term with the company's president Derek Aberle reiterating in the earnings call:

"Apple does not have a direct license with Qualcomm today. And so the royalties on Apple products that get paid to Qualcomm are reported and paid by their contract manufacturers. So although we do have a dispute now with Apple and they are challenging some of the offers and some of our licensing terms, the contracts that we have in place with their suppliers remain valid and enforceable."

Though Apple could interfere and may affect how things work out for Qualcomm with Apple's suppliers, there's not much information on that front. Many from the analyst community believe Qualcomm will win the legal battle but that could come with a lower royalty rate. As Tom Sepenzis of Northland Capital Markets puts it "As with all legal challenges, this one will take some time to resolve and could go either way, but we expect the final result will potentially involve fines but have little impact on the licensing model."

Licensing business has been Qualcomm's cash cow of late. Qualcomm's QTL segment reported $1.5B in pre-tax profit on $1.8B in revenue which is significantly larger than the $724M in pre-tax profit made by the company from selling chips and other products. Though there are question marks over the future of Qualcomm's licensing business model, the risks seem to be overplayed and it is too early to say that Qualcomm needs wholesome changes in its business model. But it's high time the smartphone chipmaker revisits its licensing practices to avoid such issues in the future.

Some Welcome News On NXP Front

NXP Semiconductor (NASDAQ:NXPI) shareholders have approved all terms proposed by Qualcomm in their latest general meeting on Jan 27th. This news reaffirms that the NXP semiconductors acquisition is on track to close by the end of CY17 despite QCOM's legal disputes. This is very vital for Qualcomm's diversification plans given the forecast of sluggish smartphone sales. According to Qualcomm CEO Steve Mollenkopf, this acquisition "will provide the next significant growth period for QUALCOMM with an estimated $138 billion serviceable addressable market in 2020."

Qualcomm's joint venture with TDK Corp. to develop radio frequency (RF) front-end modules and filters is really welcome news for QCOM stock investors. According to Steve Mollenkopf on the earnings call, they  "expect to close the JV this quarter". This JV would be a great value addition for Qualcomm as it moves more into the IoT space with the NXP acquisition. As Qualcomm expects RF front-end market alone to be a $18B opportunity by 2020.

Summing It Up

Qualcomm investors need to be aware that the company's core business, which generated $6.9 billion of free cash flow in fiscal 2016, is still strong. The risks surrounding the legal disputes seem to be priced into QCOM stock, though one cannot rule out that it may go down further. A Seeking Alpha post suggests "in the worst case, the stock could slump to $48-$50." QCOM stock is at very cheap levels, trading at a PE of 14.24, compared to the industry average of 22. Also, Qualcomm's dividend yield of 3.74% is still great and its dividends are safe even after the NXP acquisition. Given all these details QCOM stock could be a value play, albeit a risky one. The stock may not be this cheap for long, it would be prudent for risk-averse investors to stay away from QCOM stock until we get a more clear view of the verdicts of the lawsuit.

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Sreekanth Anasa Sreekanth Anasa   on Amigobulls :

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