# More 5G phones should mean more money for Qualcomm

Qualcomm
QCOM,
+1.19%
is scheduled to report fiscal fourth-quarter earnings Wednesday following the close of U.S. markets. The chip maker has long heralded the emergence of the new 5G wireless standard as a boost for its finances, and with the arrival of Apple Inc.’s
AAPL,
+1.53%
first 5G-enabled iPhones, expectations are running high for the company’s results and especially its outlook for the coming year. Apple announced its 5G phones on Oct. 13 with availability beginning in Oct. 23, and rollout is expected to factor into both the September-ending and December-ending quarters.

Bernstein analyst Stacy Rasgon believes the company still has an upside to its chip trajectory, and expects the impact of 5G sales from Apple smartphones to be “the biggest issue on the call,” along with the smartphone market’s struggles amid the COVID-19 pandemic.

“While smartphones have been weak, Sept-Q appears to be a relative bright spot; in fact, while the global smartphone market shrank 1% YoY in Sept-Q, this is far better than previous quarters, with non-AAPL/Huawei smartphones (where QCOM’s chip share is respectable) up 6% YoY and more than 40% QoQ,” Rasgon said in a note, while maintaining an outperform rating and $135 price target.

In August, Qualcomm shares got a boost when a U.S. appeals court overturned an antitrust ruling against the chip maker. That followed another stock-price surge when Qualcomm announced it had finally settled a licensing dispute with Chinese smartphone maker Huawei Technologies Co. , just a week after it had reported strong earnings.

The news over the quarter wasn’t all rosy, however: In August, cybersecurity company Check Point Software Technologies reported hundreds of vulnerabilities in certain Qualcomm chips that could be exploited by hackers in smartphones running Alphabet Inc.’s
GOOG,
+1.48%

GOOGL,
+1.31%
Android operating system.

What to expect

Earnings: Of the 25 analysts surveyed by FactSet, Qualcomm on average is expected to post adjusted earnings of $1.17 a share, up from the $1.09 a share expected at the beginning of the quarter and the 78 cents a share reported in the year-ago quarter. Qualcomm forecast $1.05 to $1.25 a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.23 a share.

Revenue: Wall Street expects adjusted revenue of $5.9 billion from Qualcomm, according to 22 analysts polled by FactSet. That’s up from the $5.72 billion forecast at the beginning of the quarter, and the $4.8 billion reported in the year-ago quarter. Adjusted revenue, which excludes Qualcomm’s Strategic Initiatives investment segment, is the metric Wall Street analysts use for their sales estimates. Qualcomm predicted adjusted revenue of $5.5 billion to $6.3 billion. Estimize expects revenue of $5.99 billion.

Stock movement: Over the September-ending quarter, Qualcomm shares rallied 29%, while the PHLX Semiconductor Index
SOX,
+1.88%
rose 12%, the S&P 500 index
SPX,
+1.78%
gained 8.5% and the tech-heavy Nasdaq Composite Index
COMP,
+1.85%
advanced 11%.

What analysts are saying

J.P. Morgan analyst Samik Chatterjee, who has an overweight rating and a $135 price target, said even with Qualcomm’s outperformance relative to the SOX index, “we argue that the shares have yet to fully reflect the 5G smartphone led upside opportunity.”

“Qualcomm’s F4Q (Sep) results will be viewed by investors in the context of positive pre-announcements as well as beats from other smartphone supply chain companies, led by a faster than expected rebound in consumer spending as well as pull in of inventory for channel fill following a drawdown earlier in the year,” Chatterjee sad in a note.

Morgan Stanley analyst Joseph Moore, who upgraded Qualcomm to an overweight rating with a $121 price target, expects momentum from the September-ending quarter to extend into the December-ending one and beyond.

“While longer term we would expect 5G baseband competition to heat back up, 2021 looks like the sweet spot for the primary drivers of the company,” Moore said. “Short-term expectations are elevated, but generally we would expect this to be another quarter that points to a strong CY21 opportunity.”

Of the 29 analysts who cover Qualcomm, 20 have buy or overweight ratings, seven have hold ratings and two have sell or underweight ratings, with an average price target of $132.21.