Qualcomm (QCOM) is set to report fourth quarter fiscal 2018 earnings results after the closing bell Wednesday. And while the San Diego-based semiconductor giant, which has seen its share price fall 1% year to date, hasn’t delivered the returns investors hoped for this year, things are poised to take a turn for the better.
The chipmaker has established a solid track record of topping analysts earnings estimates, averaging an almost 30% beat in the last two quarters. At the same time, it has ended its buyout bid for NXP Semiconductors (NXPI), which — though it would expose Qualcomm to the fast-growing automotive industry — many Wall Street analysts weren’t fans of. But that hasn’t scared away the bears.
Among them is Bank of America Merrill Lynch analyst Tal Lian, who last week downgraded Qualcomm shares to Neutral from Buy and lowered the target price from $75 to $70. That lowered targets assumes little to no growth for the company. Lian cited potential headwinds in the quarters ahead, notably softer smartphone shipments and Qualcomm’s ongoing licensing dispute with Huawei and Apple (AAPL). How Qualcomm guides on Wednesday will indicate whether Lian is right.
For the quarter that ended September, Wall Street expects Qualcomm to earn 82 cents per share on revenue of $5.53 billion. This compares to the year-ago quarter when earnings came to 92 cents per share on revenue of $5.96 billion. For the full year, ending in December, earnings of $3.62 per share would decline from $4.28 a year ago, while full-year revenue of $22.43 billion would decline 3.5% year over year.
The bulk Qualcomm's revenue is generated from its CDMA Technologies business, which makes chips for phones and other devices. In the fiscal third quarter, that segment delivered $4.09 billion in revenue, falling just shy of the $4.11 billion analysts were looking for. George Davis, the company’s CFO, explained that the weakness was due to lower demand from Apple. "We believe Apple intends to solely use our competitors' modems rather than our modems in its next iPhone release,” Davis added.
Nevertheless, there is still plenty to like with Qualcomm’s business prospects going forward. Not the least of which has to do with the emergence of 5G technology, which — thanks to its promise of lighting-fast speeds, superior responsiveness and better coverage — could be the foundational technology for areas like self-driving cars and streaming virtual reality.
Having already begun sharing the upcoming platform with several handset makers for inclusion in their next-generation devices, Qualcomm wants to be the leader in these early deployments and has promised to bring 5G connectivity to consumers' smartphones by next year. So, despite the fact that profits for the quarter and full year are projected to decline, the company must convince investors of its long-term growth prospects. And with its recently announced $30 billion buyback program, investors have tons of incentives to jump in.