Qualcomm's guidance is light after a great quarter. But we're still long-term believers

Published Wed, Jul 27 20228:14 PM EDT

Club holding Qualcomm (QCOM) beat expectations in its fiscal third quarter report, but a weaker than anticipated outlook sent shares 3% lower in after-hours trading Wednesday. Revenue increased 37% year-over-year to $10.93 billion, edging expectations of $10.86 billion, according to FactSet. Adjusted earnings of $2.96 per share, up 54% from the year-ago period, exceeded the high end of management's Q3 guidance range, and it was nicely above estimates of $2.86. Bottom line Qualcomm put together another great quarter as it continues to outexecute its guidance. Of course, the earnings beat will be overshadowed by the lower-than-expected outlook for its current quarter, but we can make the case that everyone should have known the estimates were too high coming into the print because of all the well documented commentary about a softening handset market. Trading at about 11x forward earnings per share estimates, we think QCOM is priced like future earnings are about to fall off a cliff, and that simply does not look to be the case due to the company's positioning in premium and high-end smartphones, share gains within Samsung, and most importantly, its diversification strategy with huge growth from in its auto and internet of things segments. Shares were trading about $4 lower after-hours, a reversal of all of Wednesday's regular session gains plus a little extra. But the stock has also been one of the better performing semiconductor stocks this year, down roughly 16% heading into the release. It's up about 20% in July. We continue to believe the stock deserves a higher price to earnings multiple, but we are keeping our 2 rating on the stock and lowering our price target to $185. That represents 20% upside to Wednesday's close of $153.42 per share. Segment results Q3 Qualcomm reports results in two primary segments, Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL). QCT is the semiconductor business most think of when considering Qualcomm's operations and generated the bulk of the company's total sales, while QTL grants licenses to use portions of Qualcomm's intellectual property portfolio. QCT revenue of $9.38 billion, up 45% year over year, was about in line with expectations of $9.35 billion. QCT's earnings before tax margin was 32% in the quarter, representing an increase of 4 percentage points year over year and in