Bernstein comments on Qualcomm's (QCOM.US) Q4 earnings: Revenue beat fails to mask margin pressure; handset business outlook overly optimistic.

Bernstein issues a research report stating that although Qualcomm's (QCOM.US) fiscal 2026 fourth quarter (FQ426) revenue beat expectations, margin pressure resulted in earnings per share (EPS) merely in line with expectations; guidance for the new fiscal quarter was also mixed, with the inclusion of the data center business further weighing on margins. Based on margin uncertainty, Bernstein maintains a "Market Perform" rating on Qualcomm with a price target of $155. Earnings: Revenue beat fails to mask margin pressure Bernstein notes that Qualcomm's FQ426 results were overall "decent," with revenue of $10.44 billion exceeding the market expectation of $10.10 billion. However, structurally, the pattern of revenue growth without profit growth is evident: automotive and IoT businesses performed well, offsetting the drag from a year-over-year decline in the handset business; but overall margins were low, causing EPS ($2.17) to only roughly match the market expectation of $2.16. This margin pressure is further highlighted in the new fiscal quarter (FQ127) guidance. Although the company guided revenue of $10.8 billion (above expectations), EPS guidance was only $2.25, below the market expectation of $2.31. Bernstein emphasizes that QCT (chip business) margin guidance is only 20%-22%, well below the expected 24.9%. Management said this includes a roughly 3 percentage point drag from the data center business; but even excluding that impact, margins remain about 1 percentage point below expectations, indicating the company continues to face cost pressure. Diversification story delivering, but handset market outlook overly optimistic The report notes that Qualcomm's diversification logic is becoming evident. The company expects fiscal 2027 non-handset sales (automotive + IoT + data center) to grow more than 60% year-over-year, with automotive and IoT combined growth potentially exceeding 30%; meanwhile, handset's share of total chip sales will fall below 50% (approximately 64% in fiscal 2026). However, Bernstein is cautious about the data center business's early profit contribution, borrowing the term "empty calories" to describe its "revenue growth without profit growth" characteristic. That is, while the business is beginning to contribute revenue, its margins are low and will make investors uncomfortable in the near term. Additionally, Bernstein believes management's outlook for the 2027 calendar year (CY27) handset market being "roughly flat" appears overly optimistic, and says it is surprised management did not use this opportunity to lower expectations, which increases downside risk to the handset business outlook.