Qualcomm (QCOM) is worth adding to your watchlist. Here’s why

The semiconductor boom that set off widespread chip shortage over the past several months seems to have died down as customers cut back on discretionary spending, concerned about the record-high inflation and economic uncertainties. Qualcomm, Inc. (NASDAQ: QCOM), once a beneficiary of the demand surge created by the digital transformation spree, has warned of a sales slowdown during the holiday season.

Despite the San Diego-based chipmaker reporting strong fourth-quarter results, its stock dropped this week as the weaker-than-expected first-quarter guidance did not go well with investors. The otherwise-thriving business has been under pressure from the slump in smartphone sales, a segment that accounts for around 50% of the company’s revenues — with significant contributions from top customers like Apple Inc. (NASDAQ: AAPL) and Samsung. Under a new multi-year agreement, Samsung will expand the use of Snapdragon platforms for premium Galaxy products in the future, globally.

Stock Dips

QCOM has lost about 43% since peaking a year ago, but the downturn looks temporary as it is expected to rebound to the levels seen at the beginning of the second half. The average target price indicates around 50% growth, which would lift the stock above the $150-mark in the next twelve months.

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QUALCOMM Incorporated Q4 2022 Earnings Call Transcript

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Qualcomm’s innovation-focused business model enabled it to weather recent market headwinds, including the pandemic. In the past seven years, the company constantly generated stronger quarterly earnings than widely expected. In most quarters during that period, a similar trend was visible in top-line performance also.

Cautious Outlook

While slashing its sales guidance for the holiday season, citing a bigger-than-expected slowdown in handset sales, Qualcomm’s management has warned that first-quarter profit could fall short of expectations. The projection is in line with the cautious outlook issued by others like Intel Corporation (NASDAQ: INTC) and Advanced Micro Devices, Inc. (NASDAQ: AMD), reflecting the deepening impact of the economic slowdown on demand.

While the tech firm’s growth prospects depend on future trends in the smartphone market to a large extent, its continued focus on other areas like automotive chips and Internet-of-Things are paying off handsomely. It is widely expected that customers’ diminishing spending power, geopolitical issues, and the renewed lockdown in China –a major market for electronic products including handsets — would delay smartphone recovery.  

From Qualcomm’s Q4 2022 earnings conference call:

“As we look to fiscal 2023, further deterioration of the macroeconomic environment and extended China COVID restrictions have resulted in demand weakness and temporarily elevated channel inventory across the industry. As good stewards of capital for our stockholders, we are committed to managing our business in light of the current environment without losing sight of the significant growth opportunities ahead.”

Key Numbers

In the final three months of 2022, the company’s revenues grew in double digits to $11.4 billion, mainly reflecting higher sales at the core CDMA Technologies segment. As a result, adjusted net earnings rose 23% annually to $3.13 per share, broadly in line with consensus estimates.

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Unable to recover from the post-earnings rout, QCOM lost further in the last session. Trading slightly above the $100-mark, the stock is currently at the lowest level in more than two years.