Qualcomm's (QCOM) Weak Guidance Sinks Shares

Shares of wireless chip maker Qualcomm (QCOM: Charts, News) plunged this week after the company reported its second quarter earnings, which topped analyst estimates but fell short on guidance. Qualcomm reported earnings of $1.01 per share on $4.94 billion in revenue, beating expectations of 96 cents per share on $4.84 billion in revenue.

Shares are still up 23% since the beginning of the year.

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The San Diego, California-based company, which supplies semiconductors to handset makers such as Apple (AAPL: Charts, News) and Samsung, has been a beneficiary of the rising adoption of 3G and 4G/LTE smartphone and tablet devices. CEO Dr. Paul Jacobs stated that the continuing growth of 3G and 4G/LTE devices will continue to strengthen the company.

However, with great success comes great demand. Qualcomm has repeatedly failed to produce enough 28 nanometer chips, primarily used by next generation smartphones, to meet market demand. Although an insatiable demand for its chips should encourage investors, increasing its production capabilities and supply is also likely to increase operating expenses throughout the year. Apple has been transitioning from 45 nanometer chips (used in the iPhone 4S) to 28 nanometer ones (for the upcoming iPhone 5). This shift has resulted in a shortage of 45 nm chips rather than 28 nm ones across the market.

During the second quarter, Qualcomm shipped 152 million "mobile station modem" chipsets, 29% more than the prior year quarter. The company sold its share of the 700-megahertz spectrum, bought from the FCC and split three ways with AT&T T and Verizon VZ, to AT&T for $1.9 billion. Qualcomm ended the quarter with $26.6 billion in cash.

Despite high hopes for Apple and Samsung's latest products in 2012, Qualcomm offered disappointing guidance for the current quarter. The company forecast earnings of 83 to 89 cents per share on revenue of $4.45 billion to $4.85 billion. Analysts had expected the company to forecast 90 cents per share on revenue of $4.81 billion. The lowered guidance is a result of Qualcomm increasing spending in order to rapidly acquire a greater supply of chips from its 28-nanometer foundry partners. Qualcomm's strong gross margins are a result of Taiwanese foundries, such as national giant Taiwan Semiconductor Manufacturing Company (TSM: Charts, News), which are currently unable to meet such high demand volume. "At this stage, we cannot secure enough supply to meet the increasing demand we're experiencing," explained Jacobs. "We're working closely with our partners to bring additional capacity online."

This shortfall, which could also impact Qualcomm's best-selling S4 Snapdragon chipsets, could hang over the company for the "next few quarters". Canaccord Genuity analyst Michael Walkley remains bullish on Qualcomm shares, stating, "Given that it's supply related and not demand related the shares will rally back."

For the full fiscal year, Qualcomm raised its guidance to a range between $3.41 and $3.56 ($3.61 to $3.76 on an adjusted basis) per share, on revenue between $18.7 billion and $19.7 billion. While optimistic, this still missed the average Street expectations of $3.78 per share on revenue of $19.45 billion.

Shares of Qualcomm trade at 15.15 times forward earnings with a 5-year PEG ratio of 1.15 - undervalued fundamentals for a tech stock. In addition, most analysts have pegged the company's price target in the upper $70s, signifying substantial upside for the primary supply chain link in one of the world's hottest growth industries. The company even pays a 1.5% quarterly dividend to patient investors.

Other News About QCOM
Qualcomm Loses Its Sparkle as Supply Constraints Present a Double-Edged Sword
Qualcomm may have to increase expenses to keep up with the market.
Qualcomm: We can't make enough chips to meet demand
Can Qualcomm bounce back this year? Other Stocks in the News
Yum Brands' earnings rose in Q1
Yum posts a 73% increase in profits on strong Chinese and American growth.
Starbucks to Introduce Verismo Brewers in China Next Year
Starbucks brings instant coffee to China.

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Published on Apr 23, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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