Short Qualcomm On Weak Retail Sales

Aug. 1.12 | About: Qualcomm Inc. (QCOM)

Qualcomm (NASDAQ:QCOM) is one of the darling stocks on Wall Street. Their 3G/4G technology is the backbone of the smartphone revolution and they have successfully diversified into the chip fields with the Snapdragon line of processors which power smartphones and tablets around the world.

The company is also one of the more aggressive technology companies in terms of returning capital to shareholders with a history of dividend increases.

Unfortunately, the slowdown in Europe has caught up to Qualcomm, one of the most conservative firms in terms of guidance.

Revenues (-6%), Operating Income (-9%), Net Income (-46%), and Operating Cash Flow (-20%) were all down sequentially and MSM Chip Shipments came in below guidance - a worrisome trend since the January to March quarter is often the weakest of the four quarters.

While these numbers were up year-over-year, the sequential decline is worrisome given Qualcomm's history of conservative guidance.

Total Reported Device Sales were also estimated below the March quarter and top end revenue guidance for FY12 was lowered from $19.7 to $19.1 billion.

Qualcomm has been known for giving out conservative guidance to analysts and easily beating earnings estimates. Given the recent lack of a solid earnings beat combined with declining sequential numbers into what should be strengthening sequential numbers, one has to question the price of Qualcomm stock at these levels.

Qualcomm appears to be overvalued in the current environment. As the global economy falls back into a recession, consumers may put off buying the latest Apple (NASDAQ:AAPL) iPhone or hot Android device from Google (NASDAQ:GOOG). Doing so would hurt Qualcomm in a number of areas as consumers seek to extend the life of their device rather buying the newest hot phone.

Retail sales in the United States have fallen over the past three months. Each time this has occurred a recession has come about in the coming months. Qualcomm can be looked at as a proxy for the retail tech sector or anyone looking to jump on the smartphone adoption bandwagon. If consumers are unsure of the future this will filter down to smartphone sales as customers put off buying the latest hot model for a few months.

Until there is clarity on the global economy and we begin to see increased adoption of newer devices investors should hold off on purchasing Qualcomm stock instead looking to purchase after the coming selloff and device sales begin rising sequentially once again.

A price earnings ratio of approximately 17 and a dividend yield of 1.7% appear to be expensive multiples for a stock whose growth prospects seem to be more than baked into the price. It is hard to justify those multiples with a global recession and the risk that consumers put off buying the latest device. The dividend yield for Qualcomm will put a floor under the stock price and limit any downside. If the stock were to fall to a level where the dividend yield pushes 2% I would seriously consider buying shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.