Qualcomm's (QCOM -1.36%) already-bad stock performance in 2022 just got worse. In spite of a solid conclusion to its fiscal year, the market instead decided to focus on a gloomy near-term outlook for the smartphone industry. Qualcomm's growth is taking a breather after the surge it experienced over the last few years, and many investors concluded shares aren't worth owning right now.

But that could be a big mistake. When Qualcomm gave its last earnings update on Nov. 2, the weak smartphone market was no grand revelation. Also, the market seems to be ignoring the clear growth drivers this leading chip designer still has.

With Qualcomm shares trading on the cheap, it's time to buy again.

The outlook for 2023

In its fiscal 2022 fourth quarter, which ended Sept. 25, Qualcomm reported that its revenue increased 22% year over year to a record $11.4 billion. Earnings per share grew 3% and were up 23% on an adjusted basis. Free cash flow increased 24% year over year to $803 million.  

But as is always the case, it's the future of profitability that seems to matter most to the market. On that front, the market was mighty unhappy. For the first quarter of fiscal year 2023, Qualcomm expects revenue to drop 6.5% to 14% compared to last year. Management guided earnings per share down 36% to 42% (or down 24% to 30% on an adjusted basis).

It's all because the company's primary growth engine -- the smartphone market -- is hitting a growth wall. The 5G upgrade cycle is still in full swing, but a confluence of factors is causing a temporary slowdown in new phone sales. Qualcomm thinks that calendar-year 2022 smartphone unit sales will decline by a low-teens percentage compared to 2021 as manufacturers work through their existing inventories. In addition, consumer spending is slowing, especially in China, where the government continues to impose temporary COVID-19 lockdowns on various cities, just as their supply chains were loosening up. Qualcomm Chief Financial Officer Akash Palkhiwala said this oversupply should take about two quarters to get corrected.

This isn't particularly surprising, since other chip companies like Micron Technology have already reported a slowdown in consumer spending. The good news, though, is that Qualcomm's far smaller but fast-growing Internet of Things (IoT) and automotive segments should remain in growth mode this quarter. However, since smartphones still represent some 80% of Qualcomm's sales, that market is the one being put under the microscope. Qualcomm's stock price is now down by about 40% in 2022.

The near-term outlook has changed -- but here's what hasn't

So Qualcomm is going to give back some of its tremendous growth from the last few years. Does that warrant its current low valuations of just 9.7 times earnings per share or 18.4 times free cash flow? I would argue no.

QCOM Price to Free Cash Flow Chart

QCOM Price to Free Cash Flow data by YCharts

While it could take a couple of quarters for the smartphone market to right itself, Qualcomm is still a growth company. 5G upgrades will eventually resume, and the longer-term outlook for the company's smartphone segment to grow at a low double-digit percentage over the next few years remains intact. So does the outlook for growth in the IoT (fitness trackers, smart home appliances, industrial equipment, virtual reality headsets, etc.) and automotive markets, which Qualcomm is pushing hard to make a significantly larger part of its business by the end of this decade. 

On that latter point, CEO Cristiano Amon reminded us that Qualcomm's total design wins for the auto industry (everything from in-cabin digital displays to advanced driver-assist systems) stand at $30 billion. Auto revenue was $1.37 billion in fiscal 2022, a 41% year-over-year increase.

To bridge the growth gap for the next couple of quarters, Qualcomm is tightening its belt a bit. A hiring freeze is in place, and investments in research and development are being throttled back. Nevertheless, this company will be just fine. It will remain profitable even in this downturn, it pays a dividend that currently yields 2.8%, and it repurchases stock with substantially any free cash flow left over after that (which totaled $3.1 billion over the last year).

If you believe Qualcomm can return to a low-teens percentage earnings growth rate -- perhaps by mid-calendar 2023 -- its shares look especially compelling where they are priced right now. I remain in accumulation mode.