What To Make of Qualcomm’s Latest Earnings Report

A 9% drop yesterday in the session after their fiscal Q1 earnings were released said a lot about the street’s attitude towards Qualcomm’s (NASDAQ: QCOM) report. As is often the case, Wall Street seemed to smell blood in the water before the information hit the wires and shares had sold off into the release. In any event, Qualcomm managed to beat analyst expectations for their EPS but missed on quarterly revenue.

Even though the topline number was up more than 60% year on year, recent quarters have been so consistently good that this miss will be an unnecessary tarnish on Qualcomm’s record. Having rallied 190% from last March through the end of January, shares are now facing into a rare 10% plus dip.

Still, CEO Steve Mollenkopf struck a bullish tone with the report when he said “we delivered an exceptional quarter, more than doubling earnings year-over-year due to strong 5G demand in handsets and growth in our RF front-end, automotive and IoT adjacencies, which drove record earnings in our chip business. We remain well positioned as the 5G ramp continues and we extend our core technology roadmap to adjacent industries.”

5G Potential

However, it’s the whole 5G saga and potential that might be starting to spook investors. Citi didn’t hang around in the aftermath and came out with a downgrade to Qualcomm shares yesterday, saying they expect “more instances of downside as the year progresses". They moved their rating from Buy to Neutral and cut their price target by 15% to $165.

To be fair, this is still 10% higher than where shares closed on Thursday but would only put them back at their recent highs from January. But in a week that saw Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Google (NASDAQ: GOOGL) report jaw dropping figures in their earnings' reports, Qualcomm’s miss and their shares’ reaction to it will sting all the more. Citi also picked up on management’s margin outlook which was softer than expected, and noted that this suggests that the "bulk of 5G upside is likely over."

It’s this 5G upside and potential that has underpinned Qualcomm’s stock in the past few years as we’ve written about numerous times. The prospect of this edge being eroded will be a harrowing one for investors but it’s hard to see what’s changed so much and so quickly. In late December, Qualcomm shares were getting a street high target of $200 from Baird. And the month before that saw them receiving permission from the US government to sell 4G chips to Huawei, opening up a long awaited revenue stream.

Buy The Dip

In the wake of a CEO switch last month, other sell side firms such as Canaccord Genuity, Wells Fargo, and Rosenblatt all came out bullish on Qualcomm’s prospects for 2021. It remains to be seen if Citi’s reaction will be viewed as timely or more of a knee jerk. In pre-market trading this morning, shares were showing some life and were up 1% suggesting that there are some who are happy to buy the dip.

Whatever your thoughts on the 5G opportunity at hand, Qualcomm is still a $170 billion chip company trading at a price-to-earnings ratio of 30, and reporting year on year growth of 60% in quarterly revenues. While this report is causing shares to pull back from recent highs, there are still far more reasons to be long than short Qualcomm in the long run. Any further weakness in shares is likely to quickly be bought up while the broader tech market remains as buoyant as it is.

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