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November 12, 2013

Qualcomm Guidance Raises Questions

Qualcomm (QCOM) reported 4Q13 results mostly in line with expectations. However, guidance for 2014 indicated slower growth in units and a slight decrease in average selling prices. The guidance led analysts to reduce their outlook for revenues and operating income for 2014. However, QCOM’s commitment to large share repurchases leaves earnings estimates unchanged at a little over $5.

Two issues are leading management to be cautious. First, QCOM is increasingly reliant on just Samsung and Apple, which dominate high end smartphones and use their buying power to keep QCOM pricing and margins in check. Second, QCOM’s strength at the high end leaves it underexposed to the booming market for low end smartphones, particularly in China.

I believe the cautious outlook warrants a reevaluation of the upside in QCOM’s shares. The company has an analyst meeting later this month which should provide greater clarity on the 2014 and longer term outlook. I think the shares are worth holding for now as management is very good and is likely to reassure investors at the meeting. In addition, the shares are not expensive. At less than 14 times forward earnings estimates without considering the company’s large cash balance. The shares have bounced off their post-earnings lows. I think that stability indicates underlying support for the bull thesis and keeps risk in check heading into the analyst meeting. As a result, I am comfortable continuing to own the shares while looking for further detail on the 2014 outlook and what it means for long-term growth. Lower expectations might be a good thing for QCOM shares after a long period as a Wall Street favorite.

QCOM is 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. Northlake’s regulatory filings can be found at www.sec.gov. QCOM is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at November 12, 2013 08:59 AM in QCOM