Whether justified or not, semiconductor giants Intel (INTC -3.67%) and Qualcomm (QCOM -1.32%) are, more often than not, compared to one another. The two chip giants have gone down somewhat divergent paths of late, in part because they excel in different areas of one of tech's most-important -- if not oft-overlooked -- industries.
The two chip rivals also reported earnings last week with some interesting results. So which company reported the more impressive earnings this time around? Let's take a look.
Intel's interesting quarter
The headline numbers certainly don't read nicely for Intel. Despite sales rising 2.6%, to $13.5 billion, Intel saw its quarterly net income decline an astonishing 51%, to $1.3 billion -- astonishing, that is, until accounting for the broader context at Intel.
The primary culprit behind Intel's surprise profit decline was a massive $1.4 billion restructuring charge that the company booked for the quarter as part of the broader reorganization that Intel announced in April. Backing out this and other nominal costs, non-GAAP net income totaled $2.9 billion for the quarter, still down 6% compared to Q2 2015 non-GAAP profits. Intel's stock sank just less than 3% in after-hours reaction to the report.
Image Source: Intel.
The primary point of concern among investors appears to be the pace of expansion within Intel's server chip business, perhaps its most-compelling growth opportunity amid the shrinking market for PC processors. Revenue in Intel's Data Center Group increased less than expected, rising just 7% versus last year. Though weathering structural shifts to its core business, this certainly was not one of Intel's more-memorable quarters.
So how did its rival Qualcomm fare?
Conditions improve at Qualcomm
San Diego-based Qualcomm, on the other hand, issued its most-impressive earnings release in recent memory. Thanks to improved reporting from its long-standing problems with Chinese smartphone OEMs, Qualcomm saw its sales increase 3.6%, to $6.0 billion. For context, Qualcomm's revenues had seen double-digit declines in each of its last four quarterly reports.
Unlike Intel, Qualcomm's dual-segment business model is based almost entirely on mobile chip technologies. Sales in Qualcomm CDMA Technologies (QCT), the segment that makes and sells smartphone processors and modems, saw revenue remain flat versus the year prior. Though QCT, which generates about two-thirds of Qualcomm's sales, saw its revenue growth stagnate, the division did enjoy a nice uptick in profitability with earnings before taxes (EBT) rising from $289 million to $365 million.
Image Source: Qualcomm
Turning to the company's real profit center -- its Qualcomm Technology Licensing (QTL) division -- the segment enjoyed a nice 6% rise in sales and EBT during the quarter. As referenced earlier, Qualcomm's main financial headwind in recent quarters has been its ongoing patent-enforcement issues with Chinese smartphone manufacturers.
Owing to its pivotal role in developing mobile communications standards, Qualcomm owns a trove of patents for 3G and 4G mobile networks. Thanks to its intellectual property war chest, Qualcomm has traditionally been entitled to receive royalty payments from smartphone manufacturers. However, in the past several years, handset makers in China began underreporting, or outright skirting, their payments to Qualcomm, a situation that predictably triggered substantial litigation from Qualcomm.
After quarters of legal give and take with the Chinese government and OEMs, Qualcomm finally reached an agreement on patent enforcement earlier last year. However, questions as to the degree to which Qualcomm's new agreement will be enforced in China understandably looms large in investors' minds. It's worth noting that this storyline remains ongoing, but it also appears that the worst -- in terms of royalty collection -- may finally be in Qualcomm's rearview mirror.
And the winner is...
This probably shouldn't come as a surprise to anyone making it this far into the article. Qualcomm's earnings report pretty resolutely trumped Intel's. Importantly though, that isn't the same as saying that Qualcomm is the better buy. What about their respective valuations?
As it turns out, Qualcomm and Intel trade at relatively similar valuations. After its post-earnings rally, Qualcomm currently trades at a price-to-earnings ratio of 17.9 times versus Intel's earnings multiple of 16.7 times. It's also briefly worth mentioning Qualcomm's 3.5% dividend yield also slightly exceeds Intel's, which currently yields just 3%.
At the end of the day, both Intel and Qualcomm have their own issues and risk factors. Intel must find a way to continue to offset the decline in its longtime franchise business of PC microprocessors. Its data center and Internet of Things (IoT) chip businesses certainly offer intriguing new growth opportunities, though as we saw this quarter, these segments aren't immune to their own softness, either.
For Qualcomm, the company's intellectual property franchises remains in the crosshairs of antitrust regulators around the world, most notably in the EU. Any major new headwind undoubtedly threatens the company's investment outlook. While Qualcomm might edge out Intel slightly in terms of this specific report and its potential growth runway, investors must fully understand each company's unique risks before buying either Intel or Qualcomm.
