It's been a rough year for Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC) as each faces significant hurdles. Qualcomm's string of legal issues has pressured its stock, which is down 11% this year. What impact the lawsuits will have, if any, on its all-important licensing business has led to many investors worst nightmare: uncertainty.
Intel is facing its own battles as CEO Brian Krzanich reinvents the PC chip king with a focus on burgeoning markets including cloud data centers and the Internet of Things. But based on its flat stock price this year, Intel has a way to go before gaining investor confidence.
The case for Qualcomm
Based solely on Qualcomm financial results, its stock price would likely be even higher than the 10% jump shareholders have enjoyed since it announced a stellar second quarter on April 19.
Excluding one-time items, Qualcomm reported an 8% improvement in revenue of $6 billion, and thanks to CEO Steve Mollenkopf's managing overhead -- operating expenses inched up a mere 3.7% -- earnings per share soared 29% to $1.34. But the questions persist, and rightfully so given 87% of Qualcomm's earnings before taxes last quarter were related to licensing.
Qualcomm is facing a $854 million fine from a South Korea regulatory body, another lawsuit alleging anti-competitive practices from the U.S. Federal Trade Commission, and the more recent $1 billion suit brought by longtime partner Apple (NASDAQ:AAPL) over the same issue.
The legal snafu with Apple has already hit home in that Qualcomm was forced to lower this quarter's guidance by $500 million after the former withheld payments to its suppliers, who in turn aren't able to pay royalties. Qualcomm's been here before, paying $975 million to China authorities. Qualcomm now cites China as a key growth driver. Is another happy ending in the cards?
The case for Intel
After reporting another record quarter of $14.8 billion to kick off the year, and then raising revenue and EPS guidance for the balance of 2017, Intel's stock is down 3.5%. The problem is the same one Intel has faced since the PC market began slowing several years ago: Investors can't seem to shake the notion that its past reliance on legacy desktop chips will hurt it in the long run.
The stellar results of Intel's client computing group, home to its PC-related sales, last quarter may have worked against it. A surprisingly strong PC market boosted Intel's client computing group revenue up 6% in the first quarter to $8 billion. That, say the Intel bears, certainly can't continue. But such near-term thinking disregards the other strengths of Intel's new-ish offerings.
Krzanich has made it clear Intel is a cloud data center-first provider, followed by IoT, and memory solutions, and in those areas the first quarter was a home run. Data center revenue climbed 6% to $4.1 billion, IoT sale increased 11% year over year to $721 million, and the memory unit soared 55% to $866 million.
Including data security's $534 million, combined Intel's upstart divisions and the focus of its future growth accounted for 43% of total revenue, and the percentage is climbing with each passing quarter.
And the better buy is...
Qualcomm and Intel recognize future growth lies in markets related to what is quickly becoming a digitized world, and both are taking steps to gain an edge. Qualcomm once again extended its offer for NXP because the deal will give it a leg up in IoT, just as Intel hopes its acquisition of Mobileye will boost its autonomous car efforts.
Given the questions surrounding Qualcomm, investors averse to risk would be wise to stick with the more conservative alternative, Intel. Both stocks will require patience as they shift gears to IoT, virtual reality, and drones, among others. Considering Qualcomm's 4% dividend yield compared to Intel's 3%, and more upside potential once the legal issues are resolved, the former gets my nod.