Update Qualcomm (QCOM)
Companies have characters.
If you had a friend like Intel (INTC), for example, you know he’d be up late at night figuring out a way to make the family car run just a bit better than everyone else’s.
If you had a friend like Wal-Mart (WMT), you wouldn’t be surprised to find him out in his backyard on a Saturday building a big shed to hold all the stuff he bought cheap in bulk.
And if you had a friend like Qualcomm (QCOM), he would drive you crazy by never telling you what he was going to do until well after it happened.
I’ve owned Qualcomm off and on over the last decade and I’ve got the scars to prove it. This company just can’t seem to figure out how to tell Wall Street when enthusiasm is running too high and earnings are about to disappoint.
And that’s exactly what happened—again—when the company announced earnings for the first quarter of the 2010 fiscal year after the market close on January 27.
The problem wasn’t what the company said about earnings for the just completed quarter. Qualcomm reported earnings of 62 cents a share, 6 cents a share above Wall Street expectations.
It was the surprisingly dour guidance for the second quarter that did the damage. Second quarter revenue will be just $2.4 billion to $2.6 billion. That’s way below analyst projections of $2.75 billion.
For the entire fiscal 2010 year the company told investors to expect $2.10 to $2.30 a share in earnings (Wall Street had been looking for $2.26) and revenue of $10.4 billion to $11 billion (Wall Street had projected $11.06 billion.)
Where did that come from? The guidance left analysts and investors scratching their heads. How come a company that is clearly beating competitors, gaining market share, and rolling out impressive new products at the rate that Qualcomm is won’t turn in better results for 2010?
Qualcomm should be cooking on all burners? So what’s wrong?
And because the answer to that question isn’t clear, because the company hasn’t done even a half-way decent job of explaining why this is happening, investors and analysts have been left to wonder what it is that they’re missing.
And if you can’t figure out why a company has surprised you once, you certainly are entitled to worry that it’s going to surprise you with even worse news just a little bit down the road.
The stock is now down almost 17% from the January 27 close. And you know what? I don’t blame investors and traders for selling. Qualcomm has done a terrible job at explaining what’s going on at Qualcomm.
That said, while I don’t blame sellers for selling in this situation, I do think they’re making the wrong call.
I think the reasons for Qualcomm’s guidance and the apparent disconnect between the company’s good news on everything from market share to design wins and its disappointing projections for the rest of fiscal 2010 are actually pretty clear.
Qualcomm isn’t an Intel. It isn’t a great manufacturing company. It’s a great intellectual property company that has a pretty great record of coming up with new chip designs that put it at the center of one advance in the wireless digital revolution or the other.
But it’s never been very good at plotting out a road map that insures that those breakthroughs in intellectual property get transferred into smooth or even simply predictable growth.
The problem has gotten worse, it seems, as Qualcomm has gotten bigger and as the company’s revenue stream has shifted from fees it collects from other companies that license its intellectual property to revenue it collects from the sale of actual products.
So, for example, revenue from Qualcomm Technology Licensing came in at almost exactly what analysts were expecting and the continued decline in what Qualcomm collects in fees for each device was well understood on Wall Street.
On the other hand, Qualcomm CDMA Technologies surprised to the upside on operating margins for the first quarter of fiscal 2010 and then provided absolutely puzzling guidance for the next quarter. The company said it would ship 89 million to 92 million devices—well ahead of what much of Wall Street was expecting and then lowered revenue guidance for the year.
If this was Intel, Wall Street would get what’s happening immediately. As Intel does all the time, Qualcomm is cutting prices on its older chips—to keep market share and to make life tough for competitors—as it comes out with new, smaller platform products such as the new Snapdragon chips that Taiwan Semiconductor Manufacturing (TSM) is manufacturing on its cutting edge 40 nanometer production lines.
When Intel does this kind of transition, it produces exactly the kind of bump in the road that Qualcomm just announced, but everyone on Wall Street who follows Intel understands this part of the company’s strategy and many of us who own Intel actually try to time our buys and sells by where the company stands in this transition from one chip generation to another.
Qualcomm doesn’t have that history. In its years as an intellectual property company collecting licensing fees the company didn’t practice this kind of transition in manufacturing technologies.
Qualcomm is a company learning new tricks. And so are Qualcomm investors.
I think it’s worth sticking with the stock on its short-term very bumpy ride because in the long term the company is indeed a key player in a new generation of digital devices
As of January 29, I’m going to cut my target price to $52 from an earlier $56 and stretch out the time period to December 2010 from March in recognition of the damage done by way the company hasn’t explained these bumps to investors. But I’m going to keep the stock in my Jubak’s Picks portfolio.
Full disclosure: I own shares of Qualcomm and Taiwan Semiconductor Manufacturing in my personal portfolio.
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I sold this cold turkey few weeks ago when I had chance to break even. Luckily I did not own it for long. Don’t want to be bothered by it again.
Sell low or buy more?
WHEN will you have the performance for your two portfolios for last year??
How does QCOM’s distribution of stock options to employees compare with other companies; and do they have a reputation for distributing stock options at the expense of profits to stock holders?
I had this on my watchlist, and it will remain so. At some point this will become a great buying opportunity.
I’ll wait for a strong buy signal on charts (ex- 20 day moving average crosses above the 50 day) to find my entry point.
Jim, can you give examples of the the bumps you’ve timed in the past with Intel? If we are considering this a bump to time qcom buy, sounds like sevenacorns is on track?
“BHP to spend $1.93bn on Australian iron ore
The move comes as analysts predict contract iron ore prices could rise by 40% or more in 2010″
Posted: Friday , 29 Jan 2010
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=96787&sn=Detail&pid=39
Insiders were selling their stocks prior to the bad news.
Update to Jims UK debt problem…. This one will hurt…..
U.K. Risks ‘Greek-Style’ Crisis, Conservatives Say (Update1) ‘
http://www.bloomberg.com/apps/news?pid=20601087&sid=aj4Q4VhMf7hA&pos=9
Jim,
Bite the bullet and give us an updage on Goldcorp. :<)