Semiconductor giant Qualcomm (NASDAQ:QCOM) managed to secure an 8.2% gain in the first half of 2023. While this performance is commendable, it is worth noting that Qualcomm’s trajectory diverged from the broader Nasdaq’s historic surge. Despite the positive momentum witnessed in the first half, Qualcomm stock encountered a decline of over 16% since its peak of nearly $133 in July. As of now, Qualcomm’s shares are trading around $111 per share, and the company holds a market capitalization of $122.17 billion. Additionally, investors can find solace in a dividend yield of 2.9% offered by the stock.
The current scenario begs the question: Is this dip an opportune moment to consider investing in Qualcomm, or is it merely another manifestation of the prevalent share price volatility? To address this query, a comprehensive analysis is required.
Qualcomm’s standing as a prominent player in the tech industry is underscored by its specialization in designing and manufacturing semiconductors and wireless telecom chips. The company’s impact extends across several tech domains, including wireless connectivity, low-power computing, on-device intelligence, and RF front-end technology. Furthermore, Qualcomm stands as a front-runner in the realm of premium Android smartphones, solidifying its position as a leading processor brand.
Qualcomm Stock Performance
However, it’s worth noting that despite its prowess in semiconductors, Qualcomm’s stock performance over the last decade has not mirrored the impressive gains observed in broader equity markets. While the S&P 500 Index recorded a substantial increase of 167%, and the Nasdaq 100 experienced a remarkable surge of 387% since August 2013, Qualcomm’s stock returns were comparatively modest, clocking in at 121%.
In the context of the ongoing 5G upgrade cycle, Qualcomm is poised for significant growth in the near term. Although a research report by Counterpoint predicts a decline in global smartphone sales to a decade-low this year, the recurring nature of smartphone upgrades should serve to mitigate the long-term impact on the company’s top-line growth.
However, the deceleration in smartphone sales is not the sole factor affecting Qualcomm’s trajectory. The impending loss of Apple (NASDAQ:AAPL) as a major customer, constituting approximately 10% of Qualcomm’s sales, poses a notable challenge. Apple has revealed plans to transition away from Qualcomm’s modems in favor of its own chips by 2024. Additionally, Qualcomm is grappling with market share erosion due to competitors like MediaTek, exacerbating the deceleration in its top-line growth.
In response, Qualcomm is actively diversifying its revenue streams. The company is venturing into the burgeoning field of artificial intelligence (AI), which is projected to surpass $1 trillion by 2030. Moreover, Qualcomm’s digital chassis facilitates the integration of communication features and driver assistance functionalities in vehicles, serving as a strategic move to reduce dependency on the telecom sector.
Qualcomm’s interest extends to the Internet of Things (IoT) segment, where the company is developing chips to power Meta Platforms’ (NASDAQ:META) Oculus VR headsets. In the fiscal Q3 of 2023, Qualcomm’s financial landscape revealed smartphone sales accounting for $5.3 billion, IoT revenue at $1.5 billion, and automotive revenue totaling $434 million. While the total sales experienced a YoY decline of 23%, the adjusted EPS registered a 37% drop in the June quarter.
Given the cyclicality inherent in semiconductor stocks, analysts are anticipating a 42.5% decline in earnings for fiscal 2023, largely influenced by an anticipated 47.5% drop in earnings for the current quarter.
Reflecting on analysts’ insights, among the 22 covering Qualcomm, 14 recommend a “strong buy,” 1 recommends a “moderate buy,” 6 advise a “hold,” and 1 advocates a “strong sell.” The average price target for QCOM stands at $135.95, suggesting an upside potential of approximately 22% from its present levels.
Qualcomm’s valuation paints an interesting picture. With a forward sales multiple of 3.5x and a forward earnings multiple of 13.2x, Qualcomm stock’s valuation appears reasonable within the context of industry averages.
While the recent pullback and attractive valuation may serve to limit potential downside risks for investors, Qualcomm must substantiate its ability to maintain stable earnings and cash flows throughout market cycles to effectively entice long-term investors into the fold. In navigating the intricacies of the tech landscape, Qualcomm’s strategic moves and adaptations will undoubtedly shape its trajectory and determine its position as a player in the evolving technological landscape.
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