QUALCOMM, Inc.: How To Play QCOM Stock Before Earnings?

Do you need to short QCOM stock before earnings after Qualcomm's recent legal issues?

  • Qualcomm (NASDAQ:QCOM) is scheduled to report its Q1 earnings on 25th of January after the market closes.
  • Will Qualcomm's legal troubles overshadow its earnings release?
  • Qualcomm posted strong Q4 results despite sluggish smartphone sales worldwide. Can it repeat the strong past performance in Q1?

The world's largest smartphone chipset manufacturer Qualcomm, Inc. (NASDAQ:QCOM) is scheduled to report its first-quarter fiscal 2017 earnings on Jan 25th, after market close. The earnings release, however, could be overshadowed by the recent lawsuits filed against Qualcomm by FTC and Apple (NASDAQ:AAPL) over the company's licensing practices. Qualcomm's lucrative licensing business could be at risk, with these lawsuits coming after the recent $850M antitrust fine by South Korea. QCOM stock is down by almost 6% now after reports of the company facing US anti-trust case came out. With Donald Trump being sworn in as U.S president on Jan 20th, things could get much worse for Qualcomm due to his Anti-China comments. So, QCOM stock Investors would be hoping for some good news in Qualcomm's earnings release.

The new Trump administration could be a double-edged sword for Qualcomm. The Trump team is backing the call for a crackdown on China over semiconductors, as China's strategy could have the same global impact as its steel subsidies. Also, some analysts are of the view that the FTC matter could get diluted after a new slate of commissioners were named by the Trump administration. These are welcome positive news for the smartphone chipset manufacturer. But the real issue is that many are of the view that President Trump's anti-China comments are raising the odds that Beijing regulators will try to stop Qualcomm from completing its $47B NXP Semiconductor (NASDAQ:NXPI) acquisition.

Is QCOM Stock Headed For A Rough Year Ahead In 2017?

QCOM Stock was one of the strong performers in 2016 delivering a return of 30.4%. The San Diego-based component manufacturer made a good start to 2017 with its announcements at CES 2017. However, things now have turned worse for Qualcomm, with Apple also suing the company for $1B with respect to its licensing practices. QCOM stock ended up losing almost 2.5% on Jan 20th after reports of the Apple lawsuit came to light. It appears as if Qualcomm's business model is in jeopardy since its licensing business revenues form a significant part of its overall revenues. In Q4-16, the Qualcomm Technology Licensing (QTL) segment generated revenue of $1.89B alone out of its total revenue of  $6.18B for that quarter. (Read more about Qualcomm's prospects in 2017 in this post.)

With Qualcomm facing investigations all around the world for its unfair licensing practices, the company's cash cow segment is under threat. As the smartphone market demand is slowing, the chipset manufacturer's licensing revenues become much more important to shore up its top line. Though Qualcomm has come out rather unscathed from a similar legal issue in China, it is high-time that the company sorts out its licensing practices. The growth prospects look good for Qualcomm but its legal troubles could have a negative influence on its overall business.

The NXP acquisition is an important cog in the growth wheel of Qualcomm. The present political scenario has created a cloud of uncertainty over the deal. As a QCOM stock investor, one would like to hear more about details of the progress of the acquisition. The smartphone chipmaker's move to diversify into adjacent markets like connected cars, drones, wearables, and Internet of Things devices has the acquisition at its heart. Hence, a closure is very much essential as soon as possible to have alternative streams of revenue. The future performance of QCOM stock is very much tied to the NXP acquisition and their combined performance ahead in 2017.

What To Expect From Q1 Earnings

Analysts expect Qualcomm to report an EPS of $1.18 on revenues of $6.12B. This represents a 21.65% YoY increase in EPS and 6.1% YoY increase in revenues. In the previous quarter, revenue came in at $6.18B and EPS came in at $1.28. The earnings expectations are lower than previous quarter numbers since Qualcomm's guidance wasn't quite positive, as the company is expecting a decline in chip shipments during the first quarter.

Qualcomm had forecasted Q1 2017 sales numbers to be in the range of $5.7 billion to $6.5 billion - a wide range, as the low end of the forecast, would mean a drop of 1% and the high end would mean a growth of 13% YoY. The company's EPS guidance was between $1.12 and $1.22, compared to $0.97 in the prior-year period, an increase of 15.5% at the low-end guidance and 25.7% rise at the higher end. Total reported licensed device sales are expected in the range of $58 billion to $66 billion, compared to $60.6 billion in the prior-year period. (Read about the latest coverage on QCOM stock here.)

Last quarter, the company posted an impressive 13.27% positive earnings surprise. In its last 12 earnings reports, Qualcomm has beaten EPS estimates 91% of the time. The company fell short of earnings estimates on 1 occasion.

QCOM Stock On A Downward Spiral Going Into Q1 Earnings.

QCOM stock lost about 0.21 percent after the last results were out. There is a high probability that the stock may go down further after earnings since the stock price moved down 15 times following the last 27 reported quarters. The stock is already losing momentum going into Q1 earnings due to the company's anti-trust case issues. The earnings would be an interesting one, everyone will have an eye on Qualcomm's Technology Licensing (QTL) segment numbers. Qualcomm has come out strongly in its defense against the FTC and Apple charges but investors should watch out for more commentary regarding this. Investors should also look out for more information on the NXP deal progress.

There is a sense of negative sentiment around QCOM stock. Though Qualcomm has very good long-term growth prospects, FTC complaint, and the Apple lawsuit creates a cloud of uncertainty about the company's future hardware and licensing revenue. It would be more prudent for investors to closely follow the FTC developments and not make a move for QCOM stock until there is clarity on this issue.

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Sreekanth Anasa Sreekanth Anasa   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

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