Qualcomm (QCOM 1.45%) just released numbers for its fiscal fourth quarter and fiscal 2022 (which ended September 25). Investors reacted negatively to the report, as it revealed the fiscal Q1 2023 results would likely point to a "low double-digit percentage decline" in revenue.
Three key challenges currently hamper Qualcomm. However, with its attractive valuation and market lead, investors might have written off the semiconductor stock too quickly.
The reasons for Qualcomm's struggles
Indeed, slowing consumer spending is an ongoing concern, but the company's 10-K may have offered more insight into this issue. When Qualcomm publishes this document, it offers investors some geographical context for its growth.
Unfortunately for Qualcomm, even as overall revenue grew by 32%, its Asian markets carried the company. Growth in the U.S. stayed within the single digits and accounted for only 3% of the company's revenue. In contrast, revenue increases for its foreign markets came in well into the double digits, particularly in South Korea, Vietnam, and China.
Image source: Qualcomm 2022 10-K.
Its growth overseas also points to a second challenge that receives little attention: its dependence on China. In fiscal 2022, China accounted for almost 64% of Qualcomm's revenue, slightly less than the 67% revenue share in fiscal 2021.
Nonetheless, deteriorating U.S.-China relations led to the U.S. banning sales of specific chips made with U.S. equipment to China. The portion of revenue coming from China already shows how deeply this can hurt Qualcomm. That pain could also increase significantly if U.S.-China relations worsen further.
A third challenge involves the company working to diversify away from smartphone chipsets. To this end, Qualcomm has added IoT and automotive segments. These comprised 18% and 4% of Qualcomm's revenue, respectively. They also pose risks, as each industry has numerous competitors.
The Qualcomm value proposition
Still, IoT revenue surged 37% year-over-year, while automotive increased 41% over the same period. With an estimated $30 billion design-win pipeline for its automotive segment, some investors could see Qualcomm as a screaming buy just for that reason.
Additionally, as some PC functionality moved to the smartphone, many smartphone functions will probably migrate to other devices. Hence, this diversification should pay off for Qualcomm in the long term.
Moreover, investors should remember that its handset and RF front-end segments continue to benefit from a 5G upgrade cycle. The handset segment not only makes up 66% of Qualcomm's revenue, but its revenue also increased 49% year-over-year, making it its fastest-growing segment.
Furthermore, the industry is in the midst of a 5G upgrade cycle. With Qualcomm having invented the 5G chipset, it continues to lead the industry even as companies like Taiwan-based MediaTek and Apple try to compete in that business.
Finally, investors should look at valuation. The stock's 45% decline from its 52-week high has decreased the company's P/E ratio to nine. This likely means that it would trade below Nvidia's 44 P/E ratio, even if China relations remain tense.
Putting Qualcomm into perspective
Investors should consider adding Qualcomm shares at current levels. Admittedly, sluggish sales, geopolitical tensions in China, and moves to diversify its revenue base bring uncertainty.
However, its diversification strategy could pay off in the long term. And short-term, Qualcomm continues to profit from a 5G upgrade cycle. Considering its nine P/E ratio, the market has likely priced in Qualcomm's challenges.
