Qualcomm Looks Very Impressive Thanks to the Rise of AI: Here's How to Trade It
Nice beats. Not a lot of growth, but nice beats. The guidance was pretty nice too. No wonder the stock was significantly higher in early trading.
On Wednesday afternoon, after the roller coaster ride that stock markets went on over the final ninety minutes of the regular session, Qualcomm (QCOM) , a holding in TheStreet Pro Portfolio, released that firm's fiscal second quarter financial results.
For the period ended March 24th, Qualcomm posted an adjusted EPS of $2.44 (GAAP EPS: $2.06) on revenue of $9.389B. Despite overall sales growth of just 1.3%, these numbers did beat Wall Street's expectations for both the top and bottom lines. The lion's share of the adjustments made was for the purpose of share-based compensation expense.
CEO Cristiano Amon commented in the press release: “We are excited about our continued growth and diversification, including achieving our third consecutive quarter of record QCT Automotive revenues, upcoming launches with our Snapdragon X platforms, and enabling leading on-device AI capabilities across multiple product categories.”
Operations
As total revenues were growing 1.3% to $9.389B, that number came via two avenues. Equipment and services generated revenues of $7.95B (+1.3%), while licensing drove revenue of $1.439 (+0.07%). Costs and operating expenses combined came to $7.049B (-1.9%), which was nice.
This left GAAP operating income of $2.34B (+11.9%). After accounting for interest, non-operating income, and taxes... GAAP net income hit the tape at $2.326B, up a nifty looking 36.5%. This works out to a GAAP EPS of $2.06. $2.02 for continuing operations. On an adjusted basis, net income printed at $2.761B (+14%), working out to $2.44 per diluted share.
Segment Performance
- QCT (Qualcomm CDMA Technologies) generated revenue of $8.026B (+1%), producing EBT of $2.288B (+9%) as EBT margin improved from 27% to 29%.
- Handset sales were up 1% to $6.18B.
- Automotive sales were up 35% to $603M.
- IoT sales were down 11% to $1.243B.
-QTL (Qualcomm Technology Licensing) generated revenue of $1.318B (+2%), producing EBT of $933M (+7%) as EBT margin improved from 68% to 71%.
Guidance
For the current quarter, Qualcomm is projecting revenue of $8.8B to $9.6B. This brings the midpoint well above the $9.05B that Wall Street was looking for. The firm sees QCT revenue at $7.5B to $8.1B and QTL revenue at $1.2B to $1.4B.
As to profitability, the firm is guiding towards a GAAP EPS of $1.74 to $1.94 and an adjusted EPS of $2.15 to $2.35. Again, this is better than expected guidance as Wall Street was looking for something close to $2.17.
Fundamentals
Over the past six months, Qualcomm has generated operating cash flow of $6.503B. Out of that number, the firm spent just $398M on capex, leaving free cash flow of $6.105B. Out of this number, the firm purchased a whopping $2.842B worth of marketable securities, while repurchasing $1.515B worth of common stock and distributing $1.79B in cash dividends to shareholders.
Glancing at the balance sheet, Qualcomm ended the quarter with a cash position of $13.851B and inventories of $6.087B. This puts current assets at $24.232B. Current liabilities add up to $9.143B, including short-term debt of $914M and an inconsequential amount of unearned revenue. The firm's current ratio stands at 2.65 which is very healthy. The quick ratio stands at 1.98, also very strong.
Total assets amount to $53.167B, of which $12.091B is labeled as either "goodwill" or other intangibles. At 23% of total assets, this is not a concern. Total liabilities less equity comes to $28.698B including $14.543B in long-term debt. The firm's debt-load is larger than its cash position. The gap is small, and by choice as the firm has been using its robust cash flows to invest for itself as well as return capital to shareholders. This balance sheet is in better than "good enough" shape. It's a plus.
Wall Street
What a difference of opinion on this one. Since these earnings were released last night. I have come across 22 highly rated (4+ stars at TipRanks) sell-side analysts who have opined on QCOM. After allowing for changes, among this group, there are 13 "buy" or "buy-equivalent" ratings, eight "hold" or "hold-equivalent" ratings and one outright "sell" rating. Three of the "holds" and two of the "buys" chose not to set target prices, leaving 17 targets to work with.
Among those remaining 17, the average target price is $186.76 with a high of $220 (Stacy Rasgon of Bernstein) and a low of $140 (Gary Mobley of Wells Fargo). Once those two are omitted, the average target across the remaining 15 rises to $187.67. The average "buy" target is $195.55, while the average "hold" target is $176.86.
My Thoughts
I'm impressed. Performance was solid. Guidance is better than expected. Cash flows are robust. The balance sheet is in good shape. There is nothing here that would drive me away. There are several items that I would be attracted to. There are a couple of items that I took away from the conference call that I think might be key.
CEO Christian Amon commented, "In premium and high-tier smartphones, our Snapdragon mobile platforms continue to set the bar for performance in on-device GenAI capabilities. Recently launched flagship Android devices powered by Snapdragon 8 Gen 3 are seeing strong demand globally, especially in China."
That's something we're just not hearing everywhere. CFO Akash Palkhiwala added: "We saw year-over-year handset revenues from our Chinese OEM increase by greater than 40% in the first half of fiscal ‘24, reflecting our strong competitive positioning and recovery of demand."
How impressive is that? Both leaders spoke positively of the opportunities presented now by the rise of AI for PCs and for handsets. As I said, I came away impressed.
Readers will see that in April, QCOM broke away from the ascending price channel that it had been in since last October. The stock has now gone through really two months of consolidation and had failed at the $177 level on several attempts. The stock was up 9% and trying to take and hold that level, which is our pivot, one more time.
Suddenly, relative strength looks solid. The daily MACD (moving average convergence divergence), which was looking battered, has made a turn for the better with the histogram of the 9-day EMA (exponential moving average) moving above the zero bound. I truly think QCOM can now be invested in. On this pop? I don't like to do that, but if the stock holds pivot, that will put the target price at a rough $212.
My idea? I do have that cash created by the AMD undefined sales looking for a home. I am not completely out of AMD, but I was looking for a third home for my semiconductor investment in order to spread exposure. I had been thinking about Marvell Technology (MRVL) . This earnings call really has me thinking about Qualcomm.
I think I will look for a little swoon later this afternoon. If I get one, I will enter QCOM with an entry level sized long position. If it comes in, I'll add as the gap created this morning fills. If the stock takes off, I'll have a nice trade on my hands.
At the time of publication, Stephen Guilfoyle was long AMD equity.