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Qualcomm Stock Rising on Earnings, Licensing Revenues

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Qualcomm (QCOM) stock rose as much as 6% in the extended trading on Wednesday due to its earnings results. The company posted upbeat fourth-quarter results. Qualcomm also provided strong guidance for the first quarter of fiscal 2020.

Qualcomm stock fell 0.97% to $84.63 on Wednesday. The stock is also trading 6.3% higher in the pre-market session at 7:06 AM ET today. Notably, the stock has gained around 52% on a YTD (year-to-date) basis as of Wednesday. In comparison, the S&P 500 has gained around 22.7%, while the VanEck Vectors Semiconductor ETF (SMH) has risen 51.4% YTD. Marvell Technology (MRVL), Broadcom (AVGO), Intel (INTC), Advanced Micro Devices (AMD), Nvidia (NVDA), and Micron (MU) have gained 65.2%, 24.3%, 25.1%, 94.6%, 55.9%, and 50.3%, respectively, YTD.

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Qualcomm stock gains due to upbeat earnings

Despite concerns about Huawei’s trade ban, Qualcomm beat analysts’ earnings and revenue estimates in the fourth quarter. The company gave credit to its technology licensing segment for its strong profits in the quarter.

Qualcomm’s adjusted EPS of $0.78 was above analysts’ estimates of $0.71 per share in the fourth quarter. The earnings also beat the company’s forecasted range of $0.65–$0.75 per share. However, the fourth-quarter earnings fell 12% YoY (year-over-year) due to the lower top-line and operating profits. The fourth-quarter earnings were also lower than the EPS of $0.80 in the previous quarter. Qualcomm’s operating income fell 9% YoY in the fourth quarter.

The company’s revenues reached $4.8 billion in the fourth quarter. Notably, the revenues beat analysts’ estimates of $4.7 billion. The revenues were within the company’s guided range of $4.3 billion–$5.1 billion. However, the revenues fell 17% YoY in the fourth quarter. Qualcomm’s revenues have been falling on a YoY basis for seven consecutive quarters. The decline in the QCT (Qualcomm CDMA Technologies) segment hurt the revenues in the fourth quarter. The QCT revenues fell 22% YoY in the quarter.

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Licensing revenues

We noted that Qualcomm earns more than 60% of its profits from the licensing business. The QTL (Qualcomm Technology Licensing) segment’s revenues grew 4% YoY to $1.16 billion in the fourth quarter. The QTL segment includes the licensing business, which makes money from patents and other licensing arrangements.

In the fourth quarter, Qualcomm’s licensing revenues didn’t include royalties from sales of China’s Huawei’s products. We noted that the company concluded the second interim agreement with Huawei in the third quarter. If the company doesn’t reach a royalty agreement with Huawei, China’s Huawei might not make any more payments. The company excluded royalties from Huawei sales in the first-quarter guidance.

Meanwhile, the QTL segment included royalty income from Apple (AAPL) and its contract manufacturers in the fourth quarter. We noted that Qualcomm settled its long-standing royalty dispute with Apple in April.

Qualcomm is also focusing on selling 5G chips to boost its licensing revenues. The company dominates the 5G chip market. Qualcomm expects shipments of around 175 million–225 million 5G handsets by next year. We think the 5G handset shipments will drive the company’s licensing revenues.

Guidance

Qualcomm has given a revenue guidance of $4.4 billion–$5.2 billion for the first quarter. The first-quarter guidance would include QTL revenues, which will likely increase to $1.3 billion–$1.5 billion. Analysts expect first-quarter revenues of $4.8 billion—up 0.6% YoY.

Qualcomm expects its first-quarter earnings to grow to $0.80–$0.90 per share—down 25%–33% on a YoY basis. Analysts expect a first-quarter EPS of $0.86—down 28.6% YoY.

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Qualcomm is positive about the trade deal

Qualcomm’s president is optimistic that US-China trade tensions could get resolved soon, according to a CNBC report. We noted there has been a lot of positivity about the trade deal. According to recent reports, the US and China are working to end the trade war. According to a CNBC report, a trade deal could come this month. The trade deal optimism strengthened today. CNBC reported that the two countries decided to suspend the additional tariffs.

Analysts’ recommendations 

Around 15 out of 29 analysts have given a “buy” rating on Qualcomm stock. As of Wednesday, about 13 analysts recommend a “hold,” while one analyst recommends a “sell.”

Currently, Qualcomm analysts have a 12-month target price of $83.03 on the stock. On Wednesday, the stock was trading at a premium of 1.9% to analysts’ 12-month target price. The median target price is $80.00 as of the same date.

Qualcomm’s technical levels

Qualcomm’s 14-day RSI (relative strength index) score is 64.11, which indicates that investors are near “overbuying” the stock. Notably, an RSI reading of above 70 shows that a stock is in “overbought” territory.

On Wednesday, Qualcomm stock closed near its Bollinger Band upper range level of $86.00. The value denotes that the stock is overbought at the current level.

We think that Qualcomm’s upbeat earnings results could increase its share prices. The trade truce would also lift the trading ban on Huawei, which would benefit Qualcomm.

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