News of a U.S. export ban against Chinese low-end smartphone manufacturer ZTE seems to have slammed the brakes on a recent rally by Qualcomm (NASDAQ:QCOM) stock. Qualcomm stock price had rallied 24% from its February low before the investing world was jolted after regulators imposed trade sanctions on ZTE for allegedly using four shell companies to illegally re-export controlled items to Iran in direct violation of U.S. export control laws. Although ZTE can still sell its products in the U.S., the company cannot procure components from U.S. companies. Even though affected companies such as Qualcomm are free to re-apply for new export licenses, the default decision by the US Department of Commerce will be to deny those licenses.
Source: Qualcomm stock price chart by amigobulls.com
ZTE is one of the world’s largest smartphone manufacturers, with an estimated 4% global smartphone market share. ZTE mainly competes against Samsung alongside the likes of Xiaomi and Huawei in the low-end to mid-range smartphones market. But how much business does ZTE do with U.S. smartphone component manufacturers? Turns out, quite a lot. Pacific Crest analyst John Vinh estimates that ZTE does business directly with no less than seven smartphone component manufacturers in the US. According to Vinh, FPGA manufacturer Xilinx (NASDAQ:XLNX) is the U.S. supplier most reliant on ZTE since it derives 3%-3.5% of its revenue from the company. Silicon Laboratories (NASDAQ:SLAB) is second with 2%-2.5% of its revenue coming from ZTE sales. Qualcomm, Qorvo (NASDAQ:QRVO), and IDT (NYSE:IDT), are in the middle of the pack with 2% of their revenue coming from ZTE. Cavium (NASDAQ:CAVM) andSkyworks Solutions (NASDAQ:SWKS) bring up the rear with 1.5% of their sales coming from the Chinese smartphone manufacturer.
The ZTE headwind for Qualcomm is therefore limited to ~2% of its revenue. While a 2% loss of revenue is by no means insignificant, Qualcomm might ironically be able to get away with it this time around. Qualcomm issued weak Q1 2016 guidance saying that it expects first quarter revenue of $4.9B-$5.7B against a consensus of $5.69B. During its latest earnings call, Qualcomm managed to beat consensus revenue estimate by $80M or about 1.4%. Assuming ZTE sales are spread out evenly during the year, then the revenue shortfall will be limited to ~0.5% of Qualcomm’s revenue. This implies that Qualcomm might still manage to top revenue estimates despite the ZTE fiasco.
