Update September 20, 2016 Going into the third quarter earnings season, Wall Street analysts had pegged the information technology sector of the Standard & Poor’s 500 as the only sector where estimates for the third quarter had climbed since June 30. That optimism on the sector has been backed up by reports from some smart phone sellers that sales of Apple’s (AAPL) new iPhone 7 and 7+ were running more strongly than expected. Add to that Intel’s improved guidance for the quarter and it looks like overweighting technology might be a good idea for the earnings reporting season that starts in October.
But which technology stocks?
You could go with one of the smaller companies that are big suppliers to Apple. Tear downs of the iPhone show that past suppliers such as Skyworks Solutions (SWKS), Broadcom (AVGO), and Qorvo (QRVO) are suppliers again for the new iPhone.
So is Qualcomm (QCOM) and it’s that stock that to me looks best positioned to see greater than expected revenue and earnings this quarter.
First, there’s the iPhone effect. Qualcomm had once been the sole provider of modem components for the iPhone. Apple is now dual sourcing those components with Intel (INTC) getting the bulk of the business for the iPhone 7 and with Qualcomm getting the biggest share of the iPhone 7+. Analysts had been afraid that Qualcomm would see a huge loss of share to Intel; now though it looks like the loss will be substantial but less than expected with Qualcomm retaining about 56% of the baseband market share in expected 2017 iPhone shipments, according to Canaccord Genuity.
Add to that evidence that Qualcomm’s Snapdragon 600 and 400 families are picking up share in the Android market, and it looks like Qualcomm is likely to come out of this quarter better than expected. I’d throw in improved collections of royalties and licensing payments in the Chinese market. (“Improved” in China starts, of course, from a base of “really, really bad,” I’d note.)
Qualcomm is a member of my Dividend portfolio. The shares are up 24.86% since I added them to the portfolio back on May 5, 2016. Because of that price appreciation, the dividend yield is getting a little thin at a current 3.37%, although I expect that Qualcomm will raise the dividend this quarter as it has done in recent quarters. With the likelihood that the stock could rally to $70 or so on improved revenue and earnings from today’s close at $62.70, I think Qualcomm remains a good total return package for the remainder of 2016.