Qualcomm, Inc. Earnings: Here's Why It Is Still a Compelling Stock

Despite its sell off after earnings, Qualcomm's underlying business posted solid results last quarter. And, the future is extremely bright, thanks to continued demand for its chips.

Apr 25, 2014 at 12:30PM

Chip giant Qualcomm (NASDAQ:QCOM) posted solid results for its fiscal second quarter, and yet, the market seemed unimpressed. Qualcomm cemented its position as an industry leader and is clearly benefiting from the boom in global smartphone shipments. And, since the industry has a lot of room left for growth, Foolish investors should embrace Qualcomm's sell-off as a buying opportunity.

There's a recurring theme among technology stocks and that's to reward their shareholders with hefty share buybacks and dividends. Qualcomm, like other technology giants, such as Cisco Systems (NASDAQ:CSCO), has a lot of cash piling up on the balance sheet. Big technology companies like Qualcomm and Cisco generate strong cash flow with very little debt. That's why, although it's easy to be concerned with Qualcomm's drop after posting earnings, the long-term fundamental case for Qualcomm is still intact.

Playing the expectations game
Unfortunately in the constant tug-of-war between corporate management teams and sell-side analysts, sometimes a company's underlying performance doesn't matter as much as whether it met expectations. In Qualcomm's case, the company couldn't keep up with the Wall Street expectations embedded in its valuation. The result was a painful sell-off after earnings, even though Qualcomm's business performance was quite strong.

The company generated 4% revenue growth and 8% growth in earnings per share. The reasons for growth were the widespread adoption of Qualcomm's multi-mode 3G and LTE chips, as well as record licensing revenue. During the quarter, Qualcomm shipped 188 million units of its MSM chips, representing 9% growth year over year.

Going forward, strong demand for its chips should continue, that's why management increased its full-year forecast. For 2014, Qualcomm expects 5% to 11% revenue growth and at least 12% earnings growth. The current quarter should be strong as well. The company expects 198 million MSM shipments this quarter, which would represent at least 15% growth.

Cash piling up
Qualcomm has a very strong balance sheet, with a mountain of cash on the books. As of the end of the most recent quarter, Qualcomm's cash and cash equivalents totaled more than $32 billion, up from $30 billion this time last year. That represents about one-quarter of the company's entire market capitalization.

Not surprisingly, Qualcomm is using that cash to reward shareholders. The company bought $1 billion of its own stock in the second quarter, and paid $589 million in dividends. In addition, Qualcomm recently increased its dividend by 20%.

Likewise, Cisco is in a similar position. Cisco repurchased $4 billion of its own shares in the most recent quarter, with more than $12 billion remaining in its existing share repurchase authorization. Plus, Cisco increased its dividend by 12%. At the end of the last quarter, Cisco had $47 billion in cash and equivalents on its books, representing nearly 40% of its market capitalization.

The bottom line
What investors should take away from Qualcomm's earnings report is that it's still doing a lot of things right. The stock sold off after reporting earnings, but that's largely because Wall Street expectations got ahead of themselves. There's not much management can or should do to manage irrational analyst expectations. Instead, Qualcomm needs to keep doing what it's doing, which is consistently producing strong shipment growth and turning solid profits.

Technology giants like Qualcomm and Cisco are seeing the cash pile up. In response, they're increasing dividends to shareholders and buying back billions of their own stock. While it's understandable to be disappointed by Qualcomm's results based on its ensuing stock sell off, the company now has an opportunity to buy back shares at even better prices.

Chips are in, but your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers