Present Is Gloomy For QUALCOMM, Inc. (QCOM) But Future Looks Bright

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Recent events and data suggest that QUALCOMM, Inc. (NASDAQ:QCOM) is struggling. The factors which have affected the company are fall in earnings and gloomy revenue outlook for the current fiscal year. It was for the second time that the chip maker reduced its forecast. The company lost two of its biggest smartphone customers, Apple Inc. (NASDAQ:AAPL) and SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF).

Sluggishness May Continue

For the next two quarters, QUALCOMM, Inc. (NASDAQ:QCOM) might continue to face sluggishness in the shipment of the MSM chips. That is possibly due to the shift in customer shares in the premium tier. The impact of the loss of the top two smartphone makers will not be compensated so easily, at least in the immediate two quarters.

In the March quarter, the company’s MSM chip shipment totaled 233 million, compared to its guidance of 230 – 240 million. For the June quarter, the chip maker is estimating MSM chip shipments between 210 and 230 million only. That means there is a threat of witnessing a year-over-year, as well as quarter-over-quarter, drop in the shipment. In the June quarter of 2014 the company shipped 225 million. The mid-range suggests only 215 million. The chip maker should have done remarkably well to surpass last year’s shipment number, which is quite unlikely.

Additionally, QUALCOMM, Inc. (NASDAQ:QCOM) witnessed a quarter-over-quarter drop in device sales, between 11.6% and 19.5% on an estimated basis. The company will continue to face pressure in device sales. As a result, the average selling price, which was estimated to be $193 – $199 in the December quarter, might face the downtrend pressure. The company has reduced its revenue forecast by about $1 billion for the fiscal year 2015 due to these factors.

Promising Factors

The dictum says if one door is closed another door is opened. That appears to be true for the chip makers. The first one is that the company’s Snapdragon 810 processor will be used for the development of Google Inc (NASDAQ:GOOGL)’s next-generation Project Tango smartphone platform. That was one of the topics discussed during the recent I/O conference conducted by the search engine giant. The platform will become available from the third quarter of the current calendar year in the market. However, how far this will help in translating into revenue generation can be seen probably from the first quarter of the next fiscal year. But its entry into Google’s project cannot be ignored easily.

QUALCOMM, Inc. (NASDAQ:QCOM) has settled the anti-trust issue in China by agreeing to pay a fine of about $975 million. Aside from that, the firm will also lower its royalty rates on the handsets sold in China. The agreement is vital to expanding its presence in China since that market assumed greater importance in the chip maker’s future prospects. That is because the chip maker will not likely get back business from Apple Inc. (NASDAQ:AAPL) or SAMSUNG ELECT LTD(F) (OTCMKTS:SSNLF). There will be some compromise on the pricing front. That might bring back the memories of Hewlett-Packard Company (NYSE:HPQ) and Dell in the mid-2000s.

Pricing Matters

The chip maker could fill the void of being imaginative for the OEMs in China. They do not appear to have great designs and the materials too are not of premium quality. QUALCOMM, Inc. (NASDAQ:QCOM) could take the center stage since China also has tremendous export potential. China is predicted to replace the United States in smartphone sales soon. Besides, the country’s export potential means that it can enter even America with competitive pricing.

All that the chip makers need to do is to price the premium components slightly lower. That would allow them to get into the mid-to-low tier brands. That includes Motorola Solutions Inc (NYSE:MSI), Sony Corp (ADR) (NYSE:SNE), HTC, and LG. These vendors are said to be having limited differentiation, though price points were equal to the top two smartphone makers. Therefore, there appears to be tremendous opportunities for QUALCOMM, Inc. (NASDAQ:QCOM) in Chinese OEMs that can play havoc.

Other Key Metrics

The chip maker has disclosed its accelerated share buyback program worth $5 billion. The firm has already struck a deal with two financial institutions to repurchase about 57.7 million shares. That was in line with the objective of buying back $10 billion worth of shares before March next year. Aside from this, the company also committed to returning 75% of its free cash flow to its shareholders by way of dividends and share buybacks.

The smartphone component maker also decided to monetize its L-Band spectrum in the United Kingdom by deciding to sell it. The company paid about $12.8 billion to acquire the spectrum in 2008. The monetization should boost its cash position considerably. That will also enable the company to boost its share buyback program.

Despite losing two customers, QUALCOMM, Inc. (NASDAQ:QCOM)’s revenue growth was modestly higher than the industry average of 20 basis points. The company’s debt-to-equity ratio is not only low, at 0.03, but also below the industry average. That indicates the management’s ability to manage its debt. The chip maker also has a quick ratio of 2.86, enabling it to generate any short-term cash needs.

Conclusion

It is a fact that QUALCOMM, Inc. (NASDAQ:QCOM) is a leader in the worldwide, mobile, baseband chipset market. The continued sales growth of smartphones, particularly in the emerging markets, is well-suited for long-term prospects. Also, the shift towards 4G LTE will drive growth in chip sales. More than the developed markets, the developing markets are going to be the big boon. Therefore, the company’s outlook looks to be promising with its focus on China and other markets.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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