Following Qualcomm's (NASDAQ:QCOM) most recent earnings results, the company's shares plunged more than 11%. The company reported strong results for its fiscal first quarter and even good guidance for its fiscal second quarter, but the company lowered its full-year revenue and earnings per share estimates. According to the company, this guide-down is due to three major factors:
- The company's high-end Snapdragon 810 processor "will not be in the upcoming design cycle of a large customer's flagship device" (i.e., the Samsung (OTC:SSNLF) Galaxy S6)
- "Heightened competition in China"
- Share gains on Apple's (NASDAQ:AAPL) part which shift Qualcomm's high-end chip mix more toward lower selling price modems rather than integrated Snapdragon parts
While things might seem pretty grim at the moment from these headline headwinds, I still believe that Qualcomm shares represent a fantastic opportunity for long-term investors.
A quick primer on Qualcomm's businesses
Qualcomm has two major business units: Qualcomm CDMA Technologies ("QCT"), which is the company's semiconductor arm, and Qualcomm Technology Licensing ("QTL"), which collects royalties from 3G/4G wireless device makers from the sale of 3G/4G capable devices, such as smartphones.
To give investors perspective on how each of these businesses contributes to Qualcomm's financials, during fiscal 2014 QCT generated $18.67 billion in revenue and $3.8 billion in pretax earnings. QTL, on the other hand, took in $7.57 billion in revenue but $6.59 billion in pretax profits. So, from a profit perspective, QTL is clearly more important to Qualcomm than QCT is, but QCT is a bigger driver of revenue growth.
QTL has been facing problems in China
A while back, Qualcomm disclosed that it believed that a number of China-based device vendors were underreporting 3G/4G device sales. It also disclosed that a dispute with a licensee led to that licensee reporting only a portion of its total device sales. This stoked fears that Qualcomm's licensing business might face serious long-term challenges in China, a major market for smartphones.
Given how much of Qualcomm's operating profit comes from QTL, threats to that revenue stream are going to spark panic. That said, Qualcomm announced on the last call that the dispute with the aforementioned licensee had been resolved. While this doesn't mean Qualcomm is out of the proverbial woods with respect to other licensees underreporting device shipments, it does offer a positive data point.
The chip business is under pressure now, but the long-term opportunity is still there
A bright spot through these licensing challenges had been the company's fast-growing chip business. That is, until the most recent earnings report during which Qualcomm cited the negative drivers mentioned earlier.
Investors now appear to be worried that Qualcomm is going to get squeezed at the low end and midrange of the market by competitors such as MediaTek. Further, with Apple gaining significant share at the high end of the smartphone market, and with the other major high-end player Samsung reportedly opting to use its chips more broadly in its flagship smartphones, investors seem worried that Qualcomm's higher-margin, high-end chip business might face continued long-term pressure.
While I do think that Apple will probably continue to have fairly significant share of the high-end smartphone market, I'm not convinced that Samsung's position in the high-end "non-iPhone" market is all that safe.
With companies like LG, Xiaomi, and others releasing very impressive premium Android devices at competitive prices, I'd bet that Qualcomm can make up the lost high-end business at Samsung as Qualcomm's customers potentially gain share against Samsung.
Additionally, while Samsung seems to be using its home-grown Exynos chip inside of most, if not all, of the Galaxy S6 models this round, I'm not convinced that Qualcomm is out for good. Qualcomm likely invests significantly more in mobile processor development than does Samsung (as IC Insight's data suggests), so I'd be surprised if Samsung didn't use Qualcomm's next generation high-end mobile chip for some variants of the Galaxy Note 5 and/or Galaxy S7.
In short: I don't think investors should take a single design loss at Samsung as an indication that the company's mobile chip business is doomed.
Qualcomm is ridiculously cheap and has lots of ammo for a large buyback
While I think Qualcomm's business is better in the qualitative sense than some expect, the Qualcomm story is particularly interesting at these levels because of how cheap the stock is and how much cash the company has at its fingertips.
For some perspective, Qualcomm trades at about $66 per share as of writing. At the midpoint of the company's GAAP net-income expectations, Qualcomm expects to generate $4.19 per share in earnings. This implies a GAAP price-to-earnings ratio of about 15.75, or below the S&P 500 multiple of 19.20.
While the 2015 GAAP EPS number is actually a decline from 2014 levels (which might be driving the low forward multiple), I believe that the 2015 financial performance represents just a speedbump and that the company will return to earnings growth in 2016.
That said, also keep in mind that Qualcomm has approximately $31.6 billion in cash and marketable securities. There is very little need for Qualcomm to have this much excess cash on the books, so the company's management and board of directors have the power to put into place a very large share repurchase program. The company added $5 billion to its buyback authorization about a year ago, but I believe that the company has the power to do much more.
I'm planning to buy more
In my view, this is a good opportunity to grab shares of a high-quality company on the cheap. Once The Motley Fool's trading restrictions permit, I plan to add more shares of Qualcomm stock to my personal portfolio.