Mobile chip leader Qualcomm (QCOM -0.20%) just turned in yet another fantastic quarterly report card, notching a 36% year-over-year increase in revenue in third-quarter fiscal 2022 (the three months ended June 26, 2022). Adjusted earnings per share gained even more, up 54% year over year, benefiting from improving profit margins as Qualcomm chips sop up a larger share of smartphones.
Thank the 5G mobile upgrade cycle for this -- and really for the whole incredible run Qualcomm has been on in recent years. Total revenue is on pace to more than double compared to what the company generated in fiscal 2020. And given that 5G is being applied to far more devices than just smartphones, there's a lot to like about where Qualcomm sits right now.
5G is the key
The upgrade cycle to 5G has been a massive tailwind filling Qualcomm's sails. People have been buying more smartphones in the last couple of years, in order to take advantage of the improved network performance 5G brings with it. However, that's only part of the story. Going from 4G to 5G, especially on the premium processor side where Qualcomm has focused much of its attention, means big gains in chip content per device and chip average selling price (ASP).
The result was that Qualcomm's "Handsets" revenue increased 59% year over year to $6.15 billion last quarter. On the "RF front-end" side (chips that help a device connect to a 5G signal), content gains aren't quite so dramatic. RF front-end sales were up only 9% year over year to $1.05 billion, and could actually decline this next quarter (more on that in a moment).
But overall, the takeaway here is that 5G is propelling Qualcomm higher and delivering higher profitability to shareholders too. Margins on earnings before tax (EBT) in the QCT division (which excludes the stable QTL, or Technology Licensing, division) were 32% compared to 28% last year. Qualcomm used its high rate of profitability to repurchase $500 million worth of its own stock and pay $842 million in dividends last quarter.
Qualcomm isn't the consumer-sensitive brand you think it is
It wasn't a perfect quarter, though, as made evident by RF front-end's sluggish sales results. And fiscal fourth-quarter 2022 could get bumpy too. Smartphone unit sales are expected to decline about one mid-single-digit percentage this year compared to 2021 as consumer spending slows, a sentiment that other chip companies have echoed in recent months. Qualcomm's top team said economic headwinds are causing phone manufacturers to be cautious, and some component purchases will be down for Q4. RF front-end, in particular, could fall but growth should then return in fiscal first-quarter 2023.
Overall, though, the company still expects to expand revenue 23% year over year in the final period of its current fiscal year at the midpoint of guidance. Those higher ASPs on 5G processors should keep Qualcomm in growth mode, but fast and steadily growing automotive and Internet of Things (IoT) (new consumer devices like VR headsets, PCs, network infrastructure, robotics, etc.) segments are helping too. Automotive and IoT sales increased a respective 31% and 38% year over year last quarter. Keep on the lookout for automotive tech news late in September when Qualcomm hosts its Automotive Investor Day.
Long story short, a consumer spending slowdown and macroeconomic concerns aren't going to hit Qualcomm like they would other chip companies that rely on consumer electronic sales. This company is enjoying secular growth trends from multiple sources because of 5G. After the quarterly update, the stock trades for just under 13 times expected full-fiscal year earnings per share. Qualcomm is a top semiconductor stock buy right now.
