Qualcomm: Setting Up For A Home Run... Again

Jan.22.13 | About: Qualcomm Inc. (QCOM)

Background

Qualcomm (NASDAQ:QCOM) is a stock that's easy to be a perma-bull on. I have covered the basics of the long thesis quite extensively in previous articles, so I refer you to my article "Qualcomm: Aggressively Buy Dips" for a more complete overview of why I believe that, at least over the next year, Qualcomm is a "Strong Buy" on dips. To recap the basic points:

  • The company has $26.8B in cash, cash equivalents, and marketable securities, accounting for ~25% of market capitalization in net cash.
  • The firm still runs essentially unopposed in the 4G/LTE baseband market, which is a critical feature for smartphones in developed nations. From the Apple (NASDAQ:AAPL) iPhone 5 to the Motorola (NASDAQ:GOOG) Droid Razr M, if it can utilize LTE, it probably has at least ~$20-$25 worth of Qualcomm baseband silicon. Likely more if the phone vendor also uses a Qualcomm apps processor. This is a phenomenon that is likely to persist throughout 2013.
  • The company has ample room to increase its dividend on a go-forward basis. With minimal capex requirements (fabless) and the majority of its income realized by way of licensing revenue, I believe that as growth slows, the company will continue to reward shareholders in the long run by increasing the dividend steadily.
  • The patents that it owns (and on which it collects licensing revenue) are all fundamental to the smartphone/communications industry, so this is quite a long-term revenue stream.
  • The 28nm supply shortage that hamstrung chip sales during 2012 is no longer a major headwind, so Qualcomm should be able to more easily satiate the strong demand for its products during 2013.

Earnings: Coming Soon!

While I am fully on board for Qualcomm's long-term picture, I am actually more interested in the firm's upcoming earnings report on January 30th at the moment. The company hit it out of the park at the last earnings report. The guidance for that quarter was:

  • $4.45B - $4.85B in revenue.
  • $0.78 - $0.84 non-GAAP diluted EPS.
  • 134M - 142M MSM ("mobile station modem") chipsets shipped.

The results?

  • $4.87B in revenue.
  • $0.89 non-GAAP diluted EPS.
  • 141M MSM chip shipments.

A very solid beat.

I believe that this is not a "one-time event" and is indeed a product of the secular growth drivers (smartphones/wireless) coupled with a very strong competitive position (Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC) will start to ship LTE this year, but the field is really open until Q1 2014 before these companies become non-trivial competitive pressures in the high volume phone space). Therefore, I strongly believe that Qualcomm will meet/exceed the high end of its guided range in the current quarter and, indeed, the current year, which are the following:

Q1 2013 Guide

  • Revenue: $5.6B - $6.1B (up 25% Y/Y at the midpoint).
  • $1.08 - $1.16 Non-GAAP diluted EPS.
  • 168M - 178M MSM chip shipments.

The consensus analyst estimates are the following:

  • Revenue: $5.9B (+~0.8% from midpoint of guide).
  • $1.12 Non-GAAP diluted EPS.

I am certain that the company will not "miss" its guided range, but more importantly, it seems that the Street is setting the bar right at the midpoint of the guided ranges on both revenues and non-GAAP EPS. This makes earnings a little tricky to try to "guess," since the odds are pretty much a coin-toss. However, I believe that looking at the results history over the last 4 quarters can give a solid indication of how conservative the estimates usually are:

REVENUES GUIDED MIDPOINT ACTUAL % FROM MIDPT
Q1 2012 $4.55B $4.68B +2.9%
Q2 2012 $4.8B $4.94B +2.9%
Q3 2012 $4.7B $4.63B -1.4%
Q4 2012 $4.65B $4.87B +4.7%
Click to enlarge

The average % surprise from the midpoint of guidance seems to be +2.27% with 3 out of 4 quarters showing a surprise above this average. Given that consensus analyst estimates only look for a +0.8% upside surprise from the midpoint of the guide, it seems that the risk/reward profile for a "beat" on revenues for this quarter is quite good.

A similar chart can be constructed for non-GAAP EPS, although for a growth stock that is already immensely profitable, topline growth is a lot more important than bottom line growth:

Non-GAAP EPS GUIDED MIDPOINT ACTUAL % FROM MIDPT
Q1 2012 $0.89 $0.97 +9%
Q2 2012 $0.94 $1.01 +7.4%
Q3 2012 $0.86 $0.89 +3.5%
Q4 2012 $0.81 $0.89 +9.9%
Click to enlarge

It seems that, in general, the midpoint of the Non-GAAP EPS guide is conservative, and so with the analyst estimates pegged squarely at the midpoint, the bar is set quite low for a "beat" on the bottom line.

How To Play It?

Well, I don't have a crystal ball, but the historical pattern is pretty clear: the midpoint of the guide (where the average analyst estimate seems to be sitting at) is generally a conservative estimate for Qualcomm. If you are already long the stock, then I probably wouldn't feel too scared holding on to it further. In this environment, and given the firm's secular growth drivers and consistent execution, a movement to the 52-week high of $68.87 on the back of a "beat" is not unreasonable to expect.

Further, with Mobile World Congress 2013 set to take place on February 25 - 28 (where Qualcomm will be showing off all sorts of goodies and new design wins), I believe that any positive earnings report will carry-forward positive momentum in the stock up until the conference. The February options, then, seem like a good place to craft a trade. I like the following one:

Bull Put Spread

  • Sell $65 February put for $1.92.
  • Buy $60 February put for $0.40.
  • Pocket a spread of $1.52 (Maximum Gain).
  • Your maximum loss is $3.48, but viewed in a more positive light, you will be forced to buy the shares at $63.48, a nice discount to the current trading price.

My view is that the odds are good that the stock will close above $65 by expiration due to the aforementioned drivers.

Disclaimer: I take no responsibility for the outcome of the execution of any trade mentioned here. The information provided here is solely for informational purposes. Do your own due diligence, and consult with your financial adviser before making any trades. Options, in particular, carry a significant amount of risk, and as such are not suitable for all investors.

Disclosure: I am long NVDA, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am likely to initiate the options idea presented here