Getty Images
Chip sales to smartphone vendors and how Qualcomm Inc. moves forward after fending off a takeover from Broadcom Inc. will be among the main topics of focus for investors as the chipmaker reports its earnings this quarter.
Qualcomm is scheduled to report earnings late Wednesday, but company fundamentals have been getting drowned out lately by the Broadcom takeover attempt and now with worries that a trade war may upset its own M&A plans.
When it comes to Qualcomm, President Donald Trump appears to be perfecting the art of blocking the deal. While Trump blocked Broadcom’s bid to take over Qualcomm, the company is now finding Chinese regulators hesitant to approve its takeover of NXP Semiconductors N.V. and a few analysts are saying that deal may be a casualty of Trump’s trade tensions with China. The reluctance of Chinese regulators prompted Qualcomm and NXP to push out the end date of their purchase agreement until July 25 from April 25.
Also, last week the chipmaker announced it was trimming its workforce by 4.4%, or by 1,500 employees in California, to save about $1 billion annually.
But what really matters to investors in the short term is how Qualcomm is moving chips. Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a $68 price target, said weaker-than-expected demand from Apple Inc. and Samsung Electronics Co. may prove to be a speedbump for the quarter.
“We think iPhone X builds came in below already reduced expectations, and Samsung GS9 demand was also weaker than expected in 1Q18, and likely was not contemplated in Qualcomm’s guidance,” Rolland said.
Earnings: Of 18 analysts surveyed by FactSet, Qualcomm on average is expected to post adjusted earnings of 70 cents a share, down from the 86 cents a share expected at the beginning of the quarter. Qualcomm forecast 65 cents to 75 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 74 cents a share.
Revenue: Wall Street expects revenue of $5.19 billion, according to 17 analysts polled by FactSet. That’s down from the $5.59 billion forecast at the beginning of the quarter. Qualcomm predicted revenue of $4.8 billion to $5.6 billion. Estimize expects revenue of $5.25 billion.
Stock movement: Qualcomm shares have dropped 21% year to date, compared with a less than 0.1% gain in the PHLX Semiconductor Index and a 0.1% decline in the S&P 500 index . Qualcomm shares have shed 26% since the company’s last earnings report, when it warned of a weak outlook because of a decline in modem orders from a major customer.
What analysts are saying: Mizuho analyst Vijay Rakesh, who has a buy rating, recently lowered his price target on Qualcomm to $64 from $75 not only because of headwinds from Chinese regulators but because of U.S. technology transfer restrictions on 5G technology and potential NXP divestitures if the deal does go through.
Another China concern is how the U.S. government’s blockage of sales to China’s ZTE will affect Qualcomm’s outlook and whether a blocked NXP deal will result in an alternate deal or stock buybacks, said BMO Capital analyst Tim Long. Long has a market perform rating and a $70 price target on Qualcomm.
Canaccord analyst T. Michael Walkley, who has a buy rating but recently reduced his price target to $79 from $86, said trade tensions between the U.S. and China may very well derail the acquisition of NXP, given that Chinese regulators are the last to sign off on the deal.
Also, Walkley said he was lowering near-term estimates because of sluggish smartphone marketing trends in the first half of 2018. Having fought off an acquisition by Broadcom, Walkley said shareholder feedback during that process may result in some senior management changes, but uncertainty over the NXP deal and a plan by former CEO and chairman Paul Jacobs to take the company private could delay those changes.
Susquehanna’s Rolland also thinks that management changes would be positive for the company given the lackluster support for Qualcomm’s directors at its last shareholder meeting.
Of the 25 analysts who cover Qualcomm, 13 have buy or overweight ratings, 11 have hold ratings and one has a sell rating, with an average price target of $68.73, or 36% above Monday’s close.