Thesis
As they concentrated on Qualcomm Incorporated’s (NASDAQ:QCOM) weaker-than-expected Q4 outlook, the media panned the company’s FQ3 earnings report. However, despite our analysis suggesting that semi-stocks have likely bottomed, QCOM held their June lows impressively.
Therefore, in light of June’s bear trap signal, we modified our QCOM value factors (indicating the market denied further selling downside decisively). As a result, we think the market significantly recovered from its June lows because it had expected a solid Q2 performance.
Our analysis reveals that Qualcomm’s dominance in high-end handsets, which continues to be a strong point of its business, was significant. As a result, we have recently noticed a big split in the price of QCOM and MediaTek (OTCPK:MDTKF). In light of this, we think the market is becoming more optimistic about Qualcomm’s long-term collaboration with Samsung (OTCPK:SSNLF) but less about MediaTek’s low- to mid-tier stance.
We think QCOM’s June bottom would probably hold firmly given Qualcomm’s strong QTL revenue base.
Despite this, we advise investors to be patient and wait for a significant downturn in QCOM because we don’t believe it is now undervalued. According to our analysis, it would be wise to increase holdings closer to its short-term support level of $118.
In light of this, we reiterate our current Hold rating on QCOM.
The Premium Market Is Essential To Qualcomm’s Success
Qualcomm emphasized the competitive advantage of its leadership by announcing the extension of its collaboration with Samsung. As a result, Qualcomm’s QTL portfolio offers strong multi-year visibility, underpinning its revenue foundation.
The silicon content of a Snapdragon 8 Series is at least as good as or better than the sales and profits of 5 modems for a different OEM (Apple). Therefore, it includes more devices than just Galaxy smartphones, such as Galaxy books, Windows PCs, Galaxy tablets, and potentially extended reality gadgets.
Given the higher silicon content, we think it is fantastic that Qualcomm’s crucial handsets segment—which accounted for 66% of QCT sales in Q3—has continued to drive growth.
Nevertheless, an analyst on the call was also worried about how the considerable slowdown in RFFE growth may affect future handset revenue growth. Management confirmed that such a “bifurcation” is anticipated to continue. Akash Palkhiwala, CFO, highlighted:
“We’re going to continue to have a discrepancy. There’s a lot more demand for processor content, whether CPU, GPU, camera, AI, security, audio, or video. We are increasing content across the board. And so we expect that will drive stronger revenue growth on the handset side.”
The Street, however, is still fixated on the slower growth since FY23.
Despite the strong performance of its more recent growth sectors (automotive and IoT), as noted above, we think the Street is still concerned about the possibility of a downturn in its revenue growth trajectory beginning in FY23.
According to the updated consensus expectations, which are bullish, Qualcomm’s revenue and profitability growth may continue to slow down dramatically through FY23 before bottoming out.
As a result, even if QCOM is currently reporting substantial progress, we think the market has de-rated QCOM at its January highs. As a result, we believe investors must keep an eye on Qualcomm’s Q1’23 guidance when it releases its Q4 results report (for the calendar quarter ending September). A re-rating may be in store for QCOM if management can deliver surprises over guidance.
Should I buy, sell, or hold QCOM stock?
Since its June bottom, QCOM’s price trend has deviated from MDTKF (gray line overlay), as seen above, as the market revised its evaluation of QCOM’s pre-earnings.
As a result, it also created a strong bear trap at its short-term support ($118), where we advise buying based on the current dynamics of price movement. In line with its semi-competitors, we are likewise sure that QCOM created a probable medium-term bottom in June.
Despite this, considering QCOM’s quick rise in July, we advise investors to be patient and wait for a significant fall first.
We, therefore, reiterate our current Hold rating.
Featured Image: Megapixl © Dmitryakhmetov3
