Qualcomm (QCOM) is set to report fourth quarter fiscal 2019 earnings results after the closing bell Wednesday. Shares of the San Diego-based semiconductor giant have gained nicely so far in 2019, rising 47% year to date, besting the 22% return of the S&P 500 index.
It would seem investors have opted to bet on the long-term prospects of Qualcomm and not the near-term headwinds. And rightfully so. Although Q4 expectations are underwhelming for a few reasons, including regulatory issues and royalty disputes, and the ban on China’s Huawei, which caused a dip in Q4 guidance. Wall Street now expects its Q4 earnings to fall about 22% year over year on the back of weak revenue. But things are poised to take a turn for the better.
The investment thesis in Qualcomm continues to be the industry shift towards 5G, which has considerable upside as the wireless giant. Given its breadth of IP, licensing revenue and the fact that Qualcomm’s chips are well ahead of competitors when it comes to speed and other features, it’s hard to imagine another company having more exposure to not only 5G but with the ability to capture more content per smartphone. That said, on Wednesday Qualcomm must give investors a reason to wait for the 5G opportunity to be realized.
For the quarter that ended September, Wall Street expects Qualcomm to earn 70 cents per share on revenue of $4.7 billion. This compares to the year-ago quarter when earnings came to 90 cents per share on revenue of $5.83 billion. For the full year, earnings of $3.47 per share would decline from $3.69 a year ago, while full-year revenue of $19.3 billion would decline 15% year over year.
Qualcomm has established a solid track record of topping analysts' earnings estimates. And if the company can deliver a strong quarter and guidance, as Intel (INTC) did a few weeks ago, Qualcomm stock should continue to uptrend. The bulk Qualcomm's revenue is generated from its CDMA Technologies business, which makes chips for phones and other devices. In the third quarter that business was under pressure, however, with revenue of $3.6 billion falling about 13% year over year and 4% sequentially.
The weakness caused a top line miss, though the company beat Q3 EPS estimates by 3 cents. What’s more, citing the trade war with China, Qualcomm also guided for lower Q4 revenue. But, as noted, the company’s 5G capabilities is what investors are excited about. The 5G market is expected to grow from $2 billion in 2020 to north of $23 billion by 2026.
This is a massive opportunity for Qualcomm which aims to be the leader in these 5G deployments, which could be the foundational technology for areas like self-driving cars and streaming virtual reality. On Wednesday the company will need to affirm that 5G growth expectations are realistic and issue guidance for fiscal 2020 in a way that affirms that confidence.
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