Qualcomm (QCOM) Bears the Brunt of a Price Target Cut Following Weak Q2:18 QTL Outlook

Susquehanna's Christopher Rolland now sizes up 24% in return potential for QCOM stock.

QUALCOMM, Inc. (NASDAQ:QCOM) released a print overnight that may have not been as bad as the worst Wall Street fears, but to put it bluntly, even a bull say the results were “still not good.” True, Qualcomm posted results that hit just above the Street-wide estimates. The sore spot boils down to the second quarter guide for 2018 in terms of QCOM’s QTL licensing business, which came up a whopping $250 million shy of the Street’s expectations.

That said, while Susquehanna analyst Christopher Rolland may dial down his 12-month target expectations, he continues to take the gamble on this chip giant. In reaction to last night’s quarterly earnings, the analyst reiterates a Positive rating on QCOM stock while lowering the price target from $68 to $62, which implies a close to 24% upside from current levels. (To watch Rolland’s track record, click here)

For the first quarter, QCOM posted $5.23 billion in revenue, marking a 13.4% quarter-over-quarter dip but still a marked improvement against previous Street forecasts calling for $5.19 billion. Additionally, QCOM reached a rise in gross margins to 59.7%, outclassing the analyst’s previous projection of 58.6%. The company’s non-GAAP EPS of $0.80 likewise served up a beat against the Street’s $0.70 estimate.

“While results were better than feared, we believe investors will look unfavorably at new changes to the QTL licensing framework,” explains Rolland. Though there was some strength in the QCT segment, this will not be what captures Street-wide attention. Rather, the analyst believes, “investors are likely to focus on the $250 million miss in C2Q18 QTL versus the Street, driven by: 1) typical seasonal drop off; 2) an amendment to their licensing agreement with Samsung; 3) the impact of some licensees shifting to a new SEP only license framework, which offers an effective royalty rate of 3.25% for access to 3G, 4G, and 5G cellular patents; and 4) lowering the price cap on royalties from $500 to $400 per device. We believe these QTL changes are driving the significantly reduced margin expectations for QTL (-1500 bps lower in C2Q18, including some increased litigation expenses). One positive for QTL, management noted they are currently participating in ‘very active’ discussions with the second large licensee that is withholding payment (Huawei).”

The QCT guide benefited from a rise in units and average selling prices (ASPs) coupled with de-risked China handset inventory levels. Yet, the analyst nonetheless warns QCOM confronts losses in market share for the rest of the year in face of MediaTek angling for a comeback. When glancing at M&A plays, the QCOM continues to be positive the NXP agreement can gain a green light from MOFCOM. However, the chip giant’s team also has mentioned readiness to proceed with a share repurchase Plan B should this deal not come to fruition.

TipRanks exhibits positivity circling the chip giant when it comes to consensus sentiment toward QCOM’s prospects. Out of 16 analysts polled in the last 3 months, 8 are bullish on QCOM stock, 7 remain sidelined, while 1 is bearish on the stock. With a return potential of nearly 32%, the stock’s consensus target price stands at $66.00.

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