Qualcomm's (QCOM +8.15%) stock tumbled nearly 8% during after-hours trading on Nov. 2 in response to its latest earnings report. For the fourth quarter of fiscal 2022, which ended on Sept. 25, the chipmaker's non-GAAP revenue rose 22% year-over-year to $11.39 billion, which beat analysts' estimates by $40 million. Its adjusted earnings increased 23% to $3.13 per share, which matched the consensus forecast.
Qualcomm's growth rates seem robust, but they represent a significant deceleration from previous quarters. The company's downbeat outlook for the upcoming fiscal year also shattered investors' hopes for a quick recovery. Let's take a closer look at Qualcomm's slowdown, its near-term challenges, and whether or not it's still worth buying in this rough market for semiconductor stocks.
Image source: Getty Images.
Grappling with slower smartphone sales
Qualcomm is one of the world's largest producers of mobile system-on-chips (SoCs) and baseband modems. It also owns a massive portfolio of wireless patents, which entitles it to a cut of every mobile device sold worldwide. Therefore, Qualcomm is heavily dependent on the smartphone market, which has cooled off lately due to severe COVID-19 restrictions in China, sluggish consumer spending amid high inflation, and lackluster sales following last year's 5G upgrade cycle. During the conference call, CFO Akash Palkhiwala warned that "rapid deterioration in demand and easing of supply constraints across the semiconductor industry have resulted in elevated channel inventory." In other words: Smartphone makers simply don't need as many chips anymore.
85% of Qualcomm's $44.17 billion in fiscal 2022 revenue came from its chipmaking segment, while the remaining 15% of total revenue came from the company's licensing unit. Here's a breakdown of how these two core businesses fared over the past year:
|
Metric |
Q4 2021 |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|---|
|
Chipmaking Revenue Growth (YOY) |
56% |
35% |
52% |
45% |
28% |
|
Licensing Revenue Growth (YOY) |
3% |
10% |
(2%) |
2% |
(8%) |
|
Total Revenue Growth (YOY) |
43% |
30% |
41% |
37% |
22% |
Data source: Qualcomm. *Non-GAAP basis. YOY = Year-over-year.
Qualcomm's chipmaking business lost its momentum in the second half of fiscal 2022 as its slowing sales of smartphone SoCs, which still accounted for two-thirds of the segment's full-year revenues, offset its accelerating growth in automotive chips, which only brought in 4.3% of its chipmaking revenues. That's why its higher-margin licensing business, which still relies heavily on smartphone sales, also ground to a halt. Qualcomm doesn't expect that pressure to ease anytime soon: Management reduced calendar year 2022 guidance for 3G/4G/5G handset volume growth from a mid-single-digit decline to a double-digit decline.
Management expects fiscal 2023's first quarter revenue to be 6.5%-14% less than the $10.7 billion brought in during the year-ago period. Qualcomm predicts revenue in the upcoming quarter will drop 6%-13% year over year for the chipmaking segment and 9%-20% year over year fro the licensing segment. It's anticipated that adjusted earnings per share (EPS) will slump 24%-30%, broadly missing analysts' original expectations for 6% growth.
NASDAQ: QCOM
Key Data Points
How long will this downturn last?
During the conference call, CEO Cristiano Amon warned that Qualcomm would likely struggle with the "further deterioration of the macroeconomic environment and extended China COVID restrictions" throughout fiscal 2023. But he also noted that the company wouldn't lose "sight of the significant growth opportunities ahead," as it scales up its automotive and non-handset IoT (Internet of Things) chipmaking divisions to reduce dependence on the saturated and cyclical smartphone market.
Unfortunately, I don't see Qualcomm transforming into Texas Instruments (TXN +0.71%), which has a lot more exposure to the growing automotive market and limited exposure to the sluggish smartphone market, anytime soon. Qualcomm still generates two-thirds of its chipmaking revenue from smartphone SoCs, while its smaller front-end RF and consumer IoT chip businesses still partly rely on the smartphone market. It also faces stiff competition in the automotive market, which it's pinning its future hopes on, from other chipmakers like Nvidia (NVDA +1.73%) and Mobileye (MBLY +3.61%).
Those diversification plans are further complicated by the chipmaker's relationship with Apple (AAPL +2.08%), its leading customer which accounted for over 10% of Qualcomm's fiscal 2022 revenues. Qualcomm originally expected to supply about 20% of Apple's baseband modems for its next iPhone, which will likely launch next September, but it now expects to supply the "vast majority" of those modems. It only expects to generate a "minimal" amount of revenue from Apple by fiscal 2025 after that deal ends, but it's unclear if its non-smartphone chipmaking segments can sufficiently fill that void.
Is Qualcomm's stock too cheap to ignore?
Analysts expect Qualcomm's revenue and adjusted EPS to grow 5% and 2%, respectively, in fiscal 2023. Based on those estimates, Qualcomm's stock still looks cheap at just 9 times forward earnings. But I believe those estimates are still too high in light of its latest report, so its actual forward valuation might be a bit higher. Its forward yield of 2.6% looks decent, but it also won't attract any serious income investors as long as the three-month treasury's yield exceeds 4%.
Simply put, Qualcomm's stock isn't a screaming bargain yet. Investors would arguably be better off investing in a better-diversified chipmaker like Texas Instruments than Qualcomm, which remains tightly tethered to the cyclical smartphone market, as the bear market drags on.
