After smashing FQ1 results and issuing typical tepid FQ2 guidance, Qualcomm (NASDAQ:QCOM) eventually rolled over in early morning trading in a big way. The stock hit new multi-year lows at $43.50 as more worries linger regarding royalty disputes and end-user demand for smartphones.
The weakness is not warranted for several reasons. The stock is down over 7%, and it isn't clear whether the reason is related to the guidance or a license dispute with LG Electronics (OTC:LGEAF). Both are signs of extreme pessimism for the stock repeating the theme that my research has recently highlighted.
Overblown License Issues
Probably, the highlight of the earnings call was the release that LG Electronics is now disputing contractual fees. Per Qualcomm, the company withheld around $100 million in revenue from the quarterly results for the QTL division despite LG paying the royalty fees per the existing contract.
The amount will continue to add up quarterly, and assuming a roughly equal weighting for the whole year amounts to about 5% of the annual revenue guidance in the QTL division. The existing forecast for FY16 revenues of up to $8 billion includes the numbers for LG. Any delay beyond FY16 with the arbitration proceedings would push out the recording of the revenues.
The key though is that Qualcomm doesn't lose the money unless the company was to lose the case. Considering this issue follows the under-reporting and licensing issues in China and regulatory issues in numerous countries, the market is probably overweighting the impact of the LG case.
Last quarter, the fears were regarding the Chinese under-reporting from a lack of license agreements. The company was comfortable these deals would get done, and in the last few months, QCOM has signed numerous licensing deals. So far, ZTE (OTCPK:ZTCOY), Huizhou, Xiaomi (Private:XI), Qiku, Haier (OTCPK:HRELY), and Tianyu signed agreements with Qualcomm.
These agreements don't solve the whole problem, but the company continues making progress.
Cash Is King, Not Guidance
Every quarter, the market wants to obsess over the guidance for the next quarter. Yet, the cash position and valuation suggest the market is overdoing that focus.
The market doesn't want to hear it, but Qualcomm actually has a larger portion of the market cap in cash than Apple (NASDAQ:AAPL). Excluding debt, cash now accounts for over $13 per share, leaving the enterprise value at a meager $32 for a stock earning over $4 per share.
Even better, QCOM consistently beats the meager guidance the company itself provides. The last quarter continued a trend of beating estimates. The quarterly beat of $0.07 was basically in line with past beats.
Source: Yahoo Finance
The beat for the December quarter provides a better signal for FQ2 expectations than the actual guidance. For those paying attention, Qualcomm guided to FQ1 earnings during the prior quarter of only $0.80 to $0.90. The number was far below the $1.08 estimate. The company ended up earning $0.97.
For the current FQ2, the company again guided far below analyst estimates of $1.02. This time though, QCOM suggests earning $0.90 to $1.00. Based on previous trends, the company is likely to earn somewhere around the current estimate of $1.02.
Part of the issue is that Qualcomm is required to lowball guidance due to the LG and Chinese licensing issues. In both cases, resolutions will add to earnings while non-resolutions push the benefit to future quarters. At the end of the day, QCOM has $30.6 billion in cash to use on this dip along with tons of free cash flow. Along with a dividend yield in excess of 45, it doesn't pay to get too bearish at these levels.
The end result is that the market is highly focused on the perceived negatives that aren't much more than headaches. Some of the weakness in the premium smartphone manufacturers is hurting the whole market, but the fears are overblown with Qualcomm due to the regulatory and license disagreements that tend to not impact the company long term.
The recommendation remains to own the stock as Qualcomm continues loading up on the stock at a cheap enterprise valuation of only 3x net cash.
Disclosure: I am/we are long AAPL, QCOM.
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.
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