Qualcomm Is Now an Elite Semiconductor Company: Here’s My Plan

Qualcomm (QCOM) released the firm’s fiscal second quarter results on Wednesday evening, and unlike Meta Platforms (FB) , which got all the FinTV coverage overnight, actually did hit “it” out of the park.

For the three month period ending March 27th, Qualcomm posted adjusted EPS of $3.21, or GAAP EPS of $2.57 on revenue of $11.2B. The earnings prints decisively beat expectations regardless of metric used, while also amounting to annual growth of 68%/69%. The sales print was good for year over year growth of 41%, and also beat Wall Street.

Using the adjusted data, as Qualcomm conveniently provides both sets in an easy to decipher presentation, EBT (earnings before taxes) grew 68% to $4.255B, providing net income of $3.661B.

Segment Performance

QCT (Qualcomm CDMA Technologies)… revenue increased 52% to $9.548B, producing EBT of $3.34B (+111%), which was good for an EBT margin of 35% (up from 25%).

Handsets (smart phones)… sales increased 56% to $6.325B

RF front-end (5G connection)… sales increased 28% to $1.16B

Automotive… sales increased 41% to $339M

IoT (Internet of Things)… sales increased 61% to $1.724B.

QTL (Qualcomm Technology Licensing)… revenue decreased 2% to $1.58B, producing EBT of $1.154B (-3%), which was good for an EBT margin of 73% (down from 74%).

Outlook

Again, as with the way Qualcomm illustrates both GAAP and adjusted results for analysis, the firm also does an excellent job of presenting guidance. For the current quarter (Qualcomm fiscal third), the firm sees…

Revenue of $10.5B to $11.3B (vs. consensus of $10B)

QCT revenue of $9.1B to $9.6B

QTL revenue of $1.4B to $1.6B.

GAAP diluted EPS of $2.35 to $2.55

Adjusted EPS of $2.75 to $2.95 (vs. consensus of $2.59)

Fundamentals

Qualcomm produced $2.698B in cash from operations, the best number here of the last three. This ultimately resulted in free cash flow of $1.96 per share, also the best quarterly number of the past three for that metric.

Turning to the balance sheet, the firm ended the quarter with a net cash position of $11.546B and current assets of $21.61B as the firm built up some chunky inventories. Current liabilities of (up kind of sharply) $13.432B. This number grew over three months as did the firm’s short-term borrowing. Hmm. This leaves Qualcomm with a current ratio of 1.61. Now, given that there was a huge inventory build, I am going to ex-inventories from current assets to leave $17.055B. This places the firm’s “quick ratio” at 1.27, which is still healthy. Qualcomm can meet the firm’s short to medium-term obligations.

The firm has total assets of $44.302B, including “goodwill” of $7.261B and “other intangibles” of $1.258B. Total liabilities less equity amount to $30.974B, including $12.195B in long-term debt. Total debt (including short-term borrowings) comes to $15.680B. This was down for a second consecutive quarter, and the lowest total debt number for Qualcomm at the end of a quarter for years. This balance sheet passes the Sarge test, and it is obvious that management takes managing the balance sheet seriously.

Oh, did I mention that Qualcomm’s tangible book value is now up to $4.29 per share? That’s up from $2.40 over three months and up from $1.11 over six months. Tangible book value was in negative territory nine months ago. Like I said above… hitting “it” out of the park.

As for returning capital to shareholders, over the past three months, Qualcomm paid $764M in cash dividends while repurchasing $951M worth of common stock.

Wall Street

Wall Street was not nearly as admiring of Qualcomm’s quarter as I think I am. I have found eight analysts both rated at five stars (by TipRanks) who have also opined on QCOM since these earnings were released. It’s kind of a split, with four “buy” or buy equivalent ratings and four “hold” or hold equivalent ratings. There are only six target prices as two of these analysts (one buy, one hold) declined to offer one.

The average target price across the six is $177.50, with a high of $220 (Kevin Cassidy of Rosenblatt) and a low of $150 (Gary Mobley of Wells Fargo). The average target of the three “buys” is $198.33, while the average target of the three “holds” is $156.67.

My Thoughts

I think throughout the reading and researching that goes with analyzing a stock, I have convinced myself that Qualcomm has become an elite level semiconductor company. This is a name that I have not really considered for quite some time, as I had focused on some of the other chip names. Obviously that is an oversight. Fortunately for me, the stock has come in quickly with the market, and as the industry faces headwinds.

Readers will note that there is some historical support for QCOM at $122. The stock rallied from that level all the way to $193 in early January and has given almost all of it back since. Interestingly, the firm’s Relative Strength, Full Stochastics Oscillator and daily MACD are all starting to look a little less awful.

The shares have retaken their 21 day EMA this morning, and still stand well below both the 50 day SMA ($151) and the 200 day SMA ($154). The bunching of those two averages could provide resistance, but taking one could mean taking both, and that could act as a sort of trebuchet (bet you thought I was going to write catapult).

My Plan

Wait… to see if the 21 day EMA holds.

Sell (write) May 20th $122 puts for about $1.40. (established support)

Initiate… a long equity position should the share resume their downward trend (below $130)

Note: I don’t have a target yet, as I do not have a position yet. I am impressed by the firm. I need to be careful in this environment. We know that the headwinds facing the economy have not gone away. Now we know that the US economy is in contraction… way before anyone expected. Patience won’t hurt.