How To Trade Qualcomm's Mixed Earnings Report

Nov. 8.13 | About: Qualcomm Inc. (QCOM)

Another quarter, another mix report from Qualcomm (NASDAQ:QCOM). The bad news is a disappointing guidance-the company is seeing revenues in the current quarter in the range of 5% to 15%, a disappointment for optimistic analysts. The good news is that the company met earnings expectations on slightly better than expected revenues:

• Revenues: 1 $6.48 billion, up 33 percent year-over-year (y-o-y) and 4 percent sequentially.

• Operating income: 1 $1.59 billion, up 29 percent y-o-y and down 5 percent sequentially.

Qualcomm's strong performance is propelled by strong demand for smartphone and tablet chips from Apple, Samsung, and other smartphone and tablet makers; and the upgrading of wireless networks from 3G to 4G.

"I am very pleased with our record financial performance this year as we delivered revenues of $25 billion, up 30% versus last year. Our technologies underpin the global growth of wireless data, and our semiconductor solutions are used across the industry's flagship smartphones," said Dr. Paul E. Jacobs, chairman and CEO of Qualcomm. "Looking forward, we expect continued strong growth of 3G and 3G/4G multimode devices around the world, particularly in China with the anticipated launch of LTE. Qualcomm remains well positioned from a growth standpoint, and we expect double-digit compound annual growth rates for both revenues and earnings per share over the next five years."

Qualcomm wins by keeping a close eye on customers and coming up with products to accommodate their needs. That's how the company rides the one emerging trend after another, most notably the smartphone and the tablet industry where Qualcomm has been the main supplier of chips for both Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF).

Markets have already recognized Qualcomm's leadership in emerging technologies, pushing its stock close to new highs, which bring us to the second question. What should investors do with the stock?

It depends on the investment horizon of each individual investor. Short-term investors may want to stay away from the stock, as the disappointing guidance will limit any gains. Actually, the stock was trading lower in after hours. Long-term investors may want to stay with the stock as it offers better growth prospects than its peer, Intel (NASDAQ:INTC).

Intel versus Qualcomm Financial Performance Statistics in April 2012

 

Intel

Qualcomm

Dividend

4.0%

2.20%

Operating Margins

27.44.30

30.78

Qtrly Earnings Growth (yoy):

-26.50%

36.00%

Qtrly Revenue Growth (yoy):

-3%

28.60

Click to enlarge

Source: Yahoo Finance

Intel versus Qualcomm Financial Performance Statistics in November 2013

 

Intel

Qualcomm

Dividend

3.7%

2.20%

Operating Margins

22.96

30.48

Qtrly Earnings Growth (yoy):

-.70%

30.90%

Qtrly Revenue Growth (yoy):

0.20%

35.00

Click to enlarge

Source: Yahoo Finance

1. Size. With $25 billion in sales, Qualcomm is less than half of Intel's size. This means that the law of large numbers works better for Qualcomm, as do the laws of economies. While Qualcomm is at the threshold where returns scale takes full effect, Intel is approaching the threshold where constant or even decreasing returns to scale begin to kick in.

2. Better company fundamentals. As a pioneer of CDMA technology, Qualcomm enjoys the "first mover" advantage in wireless communications; and with the recent acquisition of Atheros Communications, Qualcomm strengthened its leadership in the industry.

3. Better industry fundamentals. While Intel remains the leader in the mature PC industry, (though Intel has made several moves into wireless communications in recent years) Qualcomm maintains leadership in wireless communications- still an emerging industry. Wireless Intelligence estimates that the number of 3G users will reach 2.8 billion by 2014.

4. Riding the industry upgrade cycle. Qualcomm is expected to be the main beneficiary of the wireless communication upgrade cycle. TheGSM Association expects telecom providers to spend $100 billion by 2015 -in High-Speed Packet Access (HSPA), 3G, and 4G.

The Bottom Line: Intel is for value investors while Qualcomm is for growth investors.

Disclosure: I am long QCOM, 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.