Qualcomm (QCOM 1.41%) has driven considerable returns in past decades. Its niche in the smartphone chipset market has made its semiconductors an essential part of the advancement of wireless for decades.
Qualcomm has fallen into bear market territory from early 2022 highs, though the chip stock has outperformed the S&P 500 over the last year. But despite that relative resilience, determining whether that drop is a buying opportunity may lie both in the stock's attributes and one significant challenge.
Reason to buy: The Qualcomm "monopoly"
Qualcomm's lawyers have spent years countering the "monopoly" label. This makes sense as such a legal designation can lead to fines, penalties, and in extreme cases, a forced breakup of the company.
However, the good news for investors is the company has established its dominance based on technical capability not political power. Qualcomm is only a monopoly in the sense that a lead marathon runner monopolizes first place. Slow down, and the "monopoly" disappears. Hence, Qualcomm has to continuously outrun the likes of Apple and MediaTek to maintain this power. Still, Qualcomm should remain prosperous as long as it maintains this lead.
Moreover, Grand View Research forecasts a compound annual growth rate (CAGR) of 69% for this market through 2028. That level of growth combined with a market lead amounts to a lucrative combination.
Reason to buy: A focus on the future
Qualcomm has long held its lead in the cellphone and smartphone markets by inventing and patenting different technologies that serve as the foundation for its higher-level offerings. However, Qualcomm also remains focused on the evolving need for communication chipsets. The company envisions a world where other kinds of technology need its capabilities.
To this end, Qualcomm has invested heavily in other areas and now produces chips for other applications. It has entered the metaverse by producing chips to power Meta Platform's Oculus Qwest 2 VR headsets and has just begun to offer chips for PCs. Also, its Internet of Things (IoT) segment applies its technology to smart homes, wearables, and smart cities. It has also ventured into the automotive space through its digital chassis. This is a set of platforms that powers driver autonomy, a digital cockpit, and communications capabilities.
Reason to buy: Valuation
Additional reasons to consider Qualcomm extend to its financials. For one, it has become a bargain by any measure. Today, it supports a price-to-earnings (P/E) ratio of just 15. This is lower than tech giants such as Apple or Nvidia, which sell for 25 times and 48 times earnings, respectively.
Moreover, investors tend to associate such lower valuations with slower-growth companies. However, its recent earnings have indicated that growth is anything but slow.
Revenue for the first nine months of fiscal 2022 (which ended June 26) was $32.8 billion. This increased 35% compared with the first three quarters of fiscal 2021. Qualcomm reported $10.1 billion in net income for the first three quarters of 2022, rising 61% over the same period. Even with higher income tax expenses, profits rose as Qualcomm limited cost and expense growth to 16%.
Reason to sell: Consumer focus
Still, even with these revenue and profit increases, Qualcomm's consumer orientation may give investors pause. Although Qualcomm continues to diversify, most of its revenue comes from its handset segment, which impacts consumers directly. Amid a possible recession, consumer-oriented tech has recently shown signs of slowing. Microsoft recently reported softness in the PC market, and this could bode poorly for Qualcomm's new business segment.
But despite the consumer focus, Qualcomm reported a 59% increase in handset revenue in the fiscal third quarter, or more than $6.1 billion. Even though Qualcomm guided fiscal fourth-quarter revenue projections downward, one has to wonder how deeply the consumer slowdown has actually affected Qualcomm?
Nonetheless, peers working in areas such as the cloud have less direct exposure to the consumer market. That factor may persuade investors to choose other chip stocks over Qualcomm.
Should I consider Qualcomm?
Although Qualcomm could suffer in the near term, it continues to hold tremendous potential for long-term growth. The 5G chipset CAGR and its lead in the smartphone chipset industry continue to make it the chip provider of choice.
Also, the 15 P/E ratio indicates that many investors have not caught on to the company's potential. While many see consumer spending as a reason to buy or sell Qualcomm stock, Qualcomm appears only minimally affected by slowing consumer spending. Such conditions probably mean the chip stock will eventually profit investors.
