Qualcomm Earnings Dip Creates Buying Opportunity

Qualcomm (NASDAQ: QCOM) declined as much as 5% after reporting quarterly earnings. Not only did Qualcomm’s quarterly results miss analyst estimates, but the company’s outlook for the current quarter was much worse than analysts had anticipated.
As a result, it’s no surprise why Qualcomm shares have performed poorly as of late. The stock is down 21% from its 52-week high of $78 per share.
Qualcomm also announced a major restructuring, as it seeks to cut costs to fix its bloating cost structure.
However, there are signs of hope for Qualcomm. The company is still an industry leader, generates a lot of cash, and with regard to its various charges against earnings, will benefit from the passing of time. For these reasons, Qualcomm looks like an attractive stock at this price.

A Year to Forget

Qualcomm has had to battle a loss of a major customer, a regulatory investigation in China, the rising U.S. dollar, and exposure to the slowing Chinese economy, all in the span of one year.
These factors led Qualcomm to reduce its full-year outlook once again, which has become a disturbing habit for the company. Qualcomm had already cut its outlook twice this year. It now expects revenue to decline as much as 30% in the fourth fiscal quarter. GAAP diluted earnings could decline by as much as 54% for the quarter.
Qualcomm has vowed to cut costs to right the ship. The company is targeting $1.4 billion in cost savings this year, largely as a result of a significant job reduction, around 15% of the workforce. Separately, Qualcomm will reduce stock-based compensation by $300 million. These measures will help alleviate some of the pressure on Qualcomm’s earnings per share.

Reasons for Optimism

For all of Qualcomm’s lack of revenue growth and unimpressive outlook, the company remains a cash machine, and that’s thanks to its manageable capital expenditure levels, Qualcomm generates impressive free cash flow. Even though revenue fell 14% year over year, Qualcomm still raked in $1.7 billion of free cash flow last quarter, and $3 billion over the first three quarters.
As the cash flow rolls in, Qualcomm’s cash balance swells. That cash balance is another reason to like the company. As of the end of the quarter, Qualcomm holds $35.2 billion of cash and marketable investments, up 7% from the same time last year.
This free cash flow, and its cash on hand, are why Qualcomm can return such a large amount of cash to shareholders. The company returned $6.2 billion to investors last quarter, which consisted of $5.4 billion through share repurchases, and the remaining $757 million in dividends.
While it’s painful to see Qualcomm’s stock declines, the rising dividends are at least paying shareholders to wait for the turnaround. And, Qualcomm’s stock buybacks are being utilized at more attractive prices, now that the stock is going down.
As a result, while it may take a bit longer for Qualcomm’s turnaround to materialize, investors should be able to see some light at the end of the tunnel.
Disclosure: I am long QCOM.

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