Investors who have stakes in the large-cap tech sector have experienced a turbulent ride over the past year. Towards the end of 2022, technology stocks faced a significant decline due to the rise in interest rates and elevated levels of inflation. These factors led to increased interest costs and narrower profit margins within the sector. More recently, despite the remarkable performance of the Nasdaq 100 Index ($IUXX) during the initial half of 2023, a mixed second-quarter earnings season and indications of a sluggish global economy have cast a shadow on investor sentiment. This has triggered retracements across the stock market over the last month.
In contrast to the broader Nasdaq’s performance, shares of the semiconductor powerhouse Qualcomm (NASDAQ:QCOM) did not experience as historical a first-half growth, yet managed to achieve an 8.2% gain for the period. However, following its peak just shy of $133 this July, the stock has undergone a decline of over 16%. At its current valuation of approximately $111 per share, Qualcomm boasts a market capitalization of $122.17 billion, providing shareholders with a dividend yield of 2.9%.
The question emerges: Should the current dip in Qualcomm’s price be seen as an opportunity, or is it merely another episode of share price volatility? Let’s delve into the matter.
Analyzing Qualcomm’s Investment Viability
Renowned for its role in designing and producing semiconductors and wireless telecom chips, Qualcomm holds a leadership position in verticals like wireless connectivity, high-performance, energy-efficient computing, on-device intelligence, and RF front-end technology. Moreover, it’s the foremost processor brand for premium Android-powered smartphones.
Despite its substantial presence in the semiconductor realm, Qualcomm’s performance has lagged behind the broader equity markets over the past decade. Since August 2013, QCOM stock has yielded a return of 121%, paling in comparison to the S&P 500 Index’s gains of 167% and the Nasdaq 100’s impressive 387%.
In the immediate future, Qualcomm’s growth will be significantly influenced by the ongoing 5G upgrade cycle. A research report from Counterpoint predicts a decade-low for global smartphone sales this year. Given that the smartphone segment constitutes a substantial portion of Qualcomm’s sales, the slowdown in mobile sales has negatively affected the company’s revenue growth. However, considering the tendency of customers to upgrade their devices every few years, this slowdown might not pose a prolonged obstacle.
In addition to the broader decline in smartphone sales, Qualcomm faces the prospect of losing one of its major customers, Apple (NASDAQ:AAPL), which accounts for around 10% of its sales. Apple has unveiled plans to replace Qualcomm’s modems with its proprietary chips as early as 2024. Furthermore, Qualcomm is witnessing a decline in market share to competitors like MediaTek, exacerbating the deceleration in its revenue.
To diversify its revenue streams, Qualcomm is aiming to make inroads into the highly disruptive artificial intelligence (AI) sector, a domain projected to surpass $1 trillion by 2030 as per certain estimates. Additionally, Qualcomm’s digital chassis is enabling automobile manufacturers to integrate communication functionalities and driver assistance capabilities into vehicles, thereby expanding the company’s revenue sources beyond telecommunications. Another avenue of growth could stem from the Internet of Things (IoT) sector, as Qualcomm is actively developing chips to power VR headsets for Meta Platforms’ (NASDAQ:META) Oculus.
In the third quarter of fiscal year 2023, Qualcomm’s smartphone sales totaled $5.3 billion, followed by $1.5 billion in IoT revenue and $434 million in automotive revenue. Although total sales witnessed a 23% YoY decline, adjusted EPS plummeted by 37% in the June quarter.
Semiconductor stocks typically follow a cyclical pattern, and analysts anticipate a 42.5% overall decline in Qualcomm’s fiscal 2023 earnings, largely attributed to an expected 47.5% drop in earnings for the current quarter.
Qualcomm’s Stock Price Target
Among the 22 analysts covering Qualcomm stock, 14 strongly recommend a “buy,” one suggests a “moderate buy,” six advocate a “hold,” and one advises a “strong sell.” The average price target for QCOM stands at $135.95, representing a roughly 22% increase from its current levels.
Presently, QCOM stock is valued at 3.5x forward sales and 13.2x forward earnings, which aligns favorably with industry averages.
However, while the recent pullback and attractive valuation may mitigate potential risks for investors, Qualcomm must demonstrate its ability to stabilize earnings and cash flows across market cycles before it can truly be considered an enticing investment opportunity for shareholders.
Featured Image: Megapixl © nikkimeel
Author Faith Yakubu 
