The semiconductor industry has both prospered and reeled amid a global chip shortage. While its products command a premium price, the lack of chips left the industry unprepared to meet demand in many areas. Later, lower consumer spending eased the shortage in some parts of the industry, leading to significant stock declines.
However, chip production lags remain in key sectors of the economy, such as automotive. Moreover, any slowdown in spending will likely give way to secular growth trends, particularly for a semiconductor stock like Qualcomm (QCOM -0.54%).
Qualcomm's enduring strength
Qualcomm has long led the smartphone chipset industry. Historically, Qualcomm chips powered all of the latest cellular and, later, smartphones sold across the world. This has continued in the 5G era as the company led the way in producing chips for that latest technology.
This market lead should pay off for Qualcomm as Data Bridge Market Research forecasts a compound annual growth rate (CAGR) of 49% for the 5G smartphone chipset industry through 2028. That would take the industry's size to more than $2.5 trillion.
The company derived 66% of its revenue, or $25 billion, from handsets in fiscal 2022 (which ended Sept. 25), a tiny fraction of that industry CAGR. And although Qualcomm forecasted negative handset sales growth for the upcoming quarter, the industry's growth will likely make any slowdown temporary.
Its moves into other industries
Additionally, Qualcomm continues to look toward the future. The company wants to avoid making the same mistake Microsoft made when the smartphone invention blindsided its PC operating system business. To this end, it has moved into areas such as the Internet of Things (IoT) and automotive computing as some functionality transitions away from the smartphone. While it cannot guarantee success, its new technologies hold significant growth potential.
Qualcomm has gone into the metaverse, providing the chips that power Meta Platforms' Oculus VR headsets. The company also launched its $100 million Snapdragon Fund. It sponsors research in extended reality (XR) technologies, a move that could potentially make it a leader in a niche of XR.
These and other IoT technologies accounted for about 18% of company revenue in fiscal 2022. That is well above automotive at 4% of revenue, though Qualcomm's future in automotive appears promising.
It hosted its Automotive Investor Day in September, an event that promoted Qualcomm's Snapdragon Digital Chassis. The chassis integrates telematics and connectivity through its digital cockpit, which can manage navigation and onboard entertainment. The drive platform will also incorporate driver assistance and autonomous driving functionality, which, over time, can significantly increase growth in the automotive segment.
The signs of hope amid challenges
Nonetheless, such additions are primarily initiatives of the future, and the stock has plummeted as investors focus on current challenges. In addition, the aforementioned slowdown has hurt Qualcomm as cash-strapped consumers delay smartphone upgrades.
Moreover, investors seem unimpressed with Meta's vision of the metaverse, a sentiment that could lead to lower VR headset sales. Additionally, around 65% of Qualcomm's sales came from China in fiscal 2022. Lockdowns in that country and deteriorating U.S.-China relations could threaten the company.
Consequently, Qualcomm stock has fallen by about one-third from its 52-week high, taking its P/E ratio to 11. That takes its earnings multiple well under that of Apple, Nvidia, and a key Qualcomm manufacturer, Taiwan Semiconductor.
Consider Qualcomm
It may be time to buy the dip in Qualcomm stock at current levels. Indeed, a slowdown in consumer spending and issues related to China do not seem to bode well for the company. Also, Qualcomm has yet to establish a clear path to success with its IoT or automotive applications.
However, the 11 P/E ratio likely prices in its current challenges. Additionally, secular growth trends in smartphones and its emerging IoT and automotive technologies could leave investors wishing they had bought Qualcomm at such a low valuation.
