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April 19, 2012
Qualcomm: Good Quarter, Fuzzy Guidance
Qualcomm (QCOM) exceeded its own guidance and analyst estimates with its March quarter results.
Sales grew 28% and net income was up 21% indicating the underlying strength for QCOM's technology and chips. Despite the strong quarter, the stock is down 5% today because the company guided revenues, earnings, and chip shipments slightly below consensus for the June quarter. I think the street expected guidance at least in line with the street, probably even a little higher.
Management attributed the disappointing guidance to supply constraints. The company is unable to provide as many chips as its customers are demanding due to capacity shortfalls at QCOM's own suppliers. Against aggressive and repeated questioning from analysts, management repeated again and again that there was no demand issue. Nevertheless, there appeared to be an inconsistency between management comments and the guidance such that loss of market share or weakness in some product lines could be an issue. Toward the end of the call, management reminded listeners that a similar guidance issue occurred when the company reported in October 2011 and shipments ended up OK. This comment and management's inability to foot the figures being put forth by analysts suggests the real issue here could just be conservative guidance due to the supply issues. I suspect that in the end QCOM will beat its June quarter guidance.
While the stock is down today and may face headwinds until more clarity on the June and September quarters appears, I saw nothing in the report, guidance, or management comments that changes my very bullish thesis on QCOM over the next year or two. QCOM is benefiting from the boom in smartphones and the upgrade cycle to 3G and 4G throughout the world. The company has made a big bet on Apple but wins if almost any vendor produces top selling phones (one thing that could be happening with the guidance is a shift toward Apple when iPhone5 is still six months away). QCOM also should see a huge boost in the addressable for its chips as technology for next generation PC chips has shifted such that QCOM could be a meaningful supplier in a market it has never penetrated.
I plan to stay patient with Northlake's current holdings in QCOM and would add to positions on meaningful weakness below this morning's trading levels. Sometimes sticking with the big picture and long-term theme is necessary even amid shot-term challenges. In the case of QCOM, the investment thesis is intact, so staying the course makes sense.
Disclosure: Qualcomm and Apple are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Qualcomm and apple are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.