QUALCOMM, Inc.: Is There Any More Upside Left in QCOM Stock?
QCOM Stock Jumps 7.5% on Q2 Earnings
It’s not polite to gloat, but in my business, it’s sometimes necessary. So, excuse me while I take a victory lap for predicting that QUALCOMM, Inc.’s (NASDAQ:QCOM) relationship with Chinese smartphone makers would provide a tailwind for QCOM stock.
The firm’s third-quarter earnings proved me right. QUALCOMM saw its net income skyrocket 22% on heightened demand from China during the last three months. Its Q3 results told a story about faster-than-expected growth, which led to an immediate 7.5% bump in QCOM stock. Investors were ecstatic about the news. (Source: “Qualcomm Announces Third Quarter Fiscal 2016 Results,” QUALCOMM, Inc., July 20, 2016.)
In May, I wrote that QUALCOMM was on the verge of big gains. My main argument was that the “Snapdragon 820” was superior to every other chip on the market. But I also said that Chinese OEMs (original equipment manufacturers) would play a role in the stock’s rise. (See: “QCOM Stock: The One Reason Why You Should Be Bullish on QUALCOMM, Inc.”)
“Chinese companies like Xiaomi have been making cheaper smartphones with the Snapdragon 820,” I wrote. “They are offering customers iPhone- and Samsung-level quality for half the price. And that’s why I see Qualcomm coming out ahead in the next few years.” (Source: “QCOM Stock: The One Reason Why You Should Be Bullish on QUALCOMM, Inc.,” Profit Confidential, May 16, 2016; emphasis added.)
My point was that QUALCOMM could help make cheaper smartphones for customers in the developing world. Since those are the last pockets of growth for smartphone-makers and their suppliers, expansion into those markets is a good sign for QCOM stock.
To me, that seemed like common sense.
Now, here’s what QUALCOMM CEO Steve Mollenkopf said in the company’s Q3 earnings release:
“We delivered strong results this quarter, with EPS well ahead of our guidance based on meaningful progress with licensees in China. Our chipset business is also benefiting from a strong new product ramp across tiers, particularly with fast growing OEMs in China.” (Source: QUALCOMM, Inc., op cit.; emphasis added)
I added emphasis in the above quotations to show where the two statements overlap. It’s pretty clear that Chinese demand for smartphones is driving Qualcomm’s growth. It’s equally obvious that I called this development far in advance.
Aside from the China angle, though, there are plenty of other reasons to be bullish on QCOM stock. Here are a few positive notes from the recent report:
- Slimmer, More Efficient QUALCOMM: The company is on track to slash $1.4 billion worth of expenses, $700 million of which would be realized this year. That’s $100 million more in savings than previously expected. This year’s expected run rate is down 15.07% from 2015, mostly due to layoffs.
- Fat Checks Every Quarter: In addition to the 7.5% surge in QCOM stock, shareholders benefited from the company’s steady cash flow. Over the first three quarters of FY16, Qualcomm handed back $5.9 billion to shareholders, either through dividends or share repurchases. A 3.84% yield is nice padding for anyone’s portfolio.
- Focus on the Future: QCOM stock bears could say that the company only postponed the inevitable. Chinese growth can keep the company’s engine running for now but sooner or later, the smartphone market will reach saturation worldwide. Whether it’s today or tomorrow matters very little, because all chipmakers will see their share prices collapse eventually. That’s a pessimistic view, but it’s not 100% wrong. The Chinese tailwind is temporary and smartphones will reach peak saturation—that much is true. However, it doesn’t mean that QCOM stock will collapse. The company has made excellent investments into virtual reality and 5G technology to insulate itself in the future.
All told, QCOM stock is in good shape for further gains. It’s already up 19.88% from the start of the year, but there’s still plenty of room left to the upside.
