Qualcomm Inc.'s (QCOM) quarterly report is slated for next week, and one team of analysts on the Street is already forecasting profits to come in below expectations next year.
Earnings Upside Not Enough to Drive Stock Price Higher
Bears at Bank of America Merrill Lynch were out with a note on Wednesday in which they downgraded shares of San Diego, Calif.-based semiconductor manufacturer Qualcomm to "neutral" from "buy". According to Bank of America's Tal Liani, even strong earnings will not be enough to offset softer smartphone demand and ongoing licensing disputes with global smartphone giants Apple Inc. (AAPL) and Huawei Technologies Inc.
“Our model suggests that management has exhausted most opportunities for P&L restructuring, yet earnings upside is not likely to be sufficient to increase the share price,” Liani wrote. “In addition, smartphone demand is softening and we reduce our estimates accordingly.”
The BofA strategist added that benefits from a transition to next-generation wireless technology will not begin to materialize until at least a year or longer. “5G is not expected to be a major driver in the foreseeable future, with meaningful device shipments only starting in 12-18 months,” he wrote.
Meanwhile, it is still fully up in the air when costly disputes with Apple and Huawei will end.
What's Next for Qualcomm
Even so, Liani slightly increased his FY19 EPS guidance to $4.21, still 6% lower than the consensus and well below the company's guidance of $5.25. The analyst also cut his 2020 EPS estimate for Qualcomm from $5.64 to $4.96. BofA's new price target, down from $75 to $70, implies a near 19% upside from current levels.
Moving ahead, things aren't looking so hot for the chip industry at large, with multiple Wall Street banks citing deteriorating sector fundamentals and the onset of a larger industry down cycle. Unless Qualcomm can pull off something spectacular when it reports earnings on Nov. 7, 2018 after market close, bears see little potential for positive movement in shares.
Trading up 0.3% to $63.08 on Thursday morning, Qualcomm shares reflect a 1.5% decrease year-to-date compared to the iShares PHLX Semiconductor ETS (SOXX) 3.1% decline and the S&P 500 Index's 1.8% increase over the same period.