This past weekend Barron’s profiled QCOM, a few days after its annual analyst meeting, with the title of the article echoing the conclusion of the author, “Qualcomm Ages Gracefully“, suggesting that “Qualcomm is still fit and has the resources to stay healthy and profitable for a good long time”. Investors seem to agree as the stock has rallied 10% in a straight-line in the two weeks since the company issued weaker than expected Q4 guidance on Nov 7th (earnings gap circled below in month to date chart).
Even with the recent strength, the stock still remains a massive laggard year to date up about 18% vs the SPX up 26.5%, the Nasdaq up 32.2% and the SOX up 31.4%. Why the relative weakness ytd? The company expects double digit earnings growth for fiscal 2014 (company just guided to 10% to 14%, street consensus sits at about 10%, so they remain a bit skeptical). As Barron’s puts it, “That earnings growth figure, however, is a far cry from the 30% rate QCOM has averaged over the past three years”, and additionally they cite smartphone saturation in the developed world and the lower average selling prices in emerging markets where QCOM will get much of its future growth.
The bear case is fairly well known among tech investors, and in many ways AAPL’s under-performance in a raging bull market is exhibit A for investors’ worries that smartphones will suffer the same fate as PCs and dissolve into commoditized hell.
Aside from the financials and product road-map, investors wanted to get a sense for management’s continued commitment to return their $29.4 billion in cash (representing 24% of their market cap, with no debt on their balance sheet) to shareholders. In September, the company announced a $5 billion share repurchase agreement (replacing the prior one) and just reiterated that it would “return 75% of its free cash flow and increase the dividend (currently yields 1.92%) by more than its earnings growth”.
Despite investors’ reluctance to go all in, QCOM has broken out to levels not seen since the height of the internet bubble back in 1999. The 14 year chart below shows the recent breakout and what looks like could be an easy march to $80.
Just this morning though, China’s National Development and Reform Commission (NDRC) notified QCOM that they started an investigation of the company relating to anti-monopoly laws. The stock is down 2% in the pre-market on the news. I have no idea how important it is, but I would say that if the stock were to retrace 50% of the recent move off the November lows, somewhere just below $70, ideally at the 50 day moving average of about $69, then I would very likely look to make a bullish bet with defined risk into the new year.
QCOM is a market leader in mobile chips, with a pristine balance sheet and a history of moving to supply new markets well ahead of its snail-like competitors (looking at you INTC). If the competition worries are a short-term blip, then we’re on the lookout to buy the dip.