After a lot of worry on the part of investors, Qualcomm (QCOM) reported solid June quarter results and provided guidance for more the same. QCOM shares have lagged in 2013 due to investor fears about a slowdown in high end smartphone demand. Despite signs of slower growth (offset by a positive surprise in iPhone volumes last quarter), QCOM hit its numbers. QCOM also is buying back its stock aggressively showing confidence in its outlook. The shares trade at just 12 times EPS estimates unadjusted for $15 per share in cash. With revenue, operating income, and EPS all set to grow at least double digits even in a tougher competitive environment, the shares look inexpensive. Apple’s next iPhone introduction could serve as a positive catalyst and allow the stock to catch up to the market’s big gains this year. A a target in the mid $70s, providing 20% upside remains realistic.
Besides just hitting numbers and guidance, upside in the quarter was driven by good pricing. With average selling prices for smartphones falling as mix shifts to low and mid-end phones in emerging markets, there is fear that QCOM’s margins will come under pressure. If this sounds familiar, it is because you hear the same thing about Apple.
I think these fears are overdone as QCOM and AAPL both showed this quarter that they can navigate moderately falling average selling prices and maintain decent margins. The next quarter or two should provide insight into whether my thesis makes proves correct. If so, upside in QCOM is substantial as the multiple expands and earnings estimates rise slightly. As with AAPL, a large share buyback, incredible financial strength, and cheap valuation provide support and set up an attractive near-term risk-reward tradeoff into new smartphone introductions this fall from Motorola (Google), Apple, and Samsung.
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. Northlake’s regulatory filings can be found at www.sec.gov. Qualcomm and Apple are net long positions 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.