Qualcomm's (QCOM -2.36%) stock stumbled 40% in 2022 as investors fretted over its cooling sales of smartphone chips. The broader cyclical slowdown of the semiconductor sector, rising interest rates, and other macroeconomic headwinds made it even less appealing as investors rotated toward more balanced blue-chip stocks.
But after that steep decline, Qualcomm's stock trades at just 11 times forward earnings, and pays a forward dividend yield of 2.7%. Is it the right time to buy Qualcomm as a turnaround play? Let's review the bear and bull cases to decide.
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What the bears will tell you about Qualcomm
Qualcomm generates most of its revenue from its chipmaking (QCT) division, which sells mobile SoCs (system on chips), baseband modems, radio frequency (RF) front-end chips, automotive chips, and Internet of Things (IoT) chips. In fiscal 2022 (which ended last September), the QCT segment generated two-thirds of its revenue from the smartphone market.
Global sales of new smartphones have been decelerating following the big 5G upgrade cycle from 2019 to 2021. Ongoing COVID lockdowns in China and inflationary headwinds are exacerbating that slowdown. Qualcomm's QCT revenue rose 64% in fiscal 2021 and grew 39% in fiscal 2022, but it's bracing for a 6% to 13% year-over-year drop in the first quarter of 2023.
A month ago, market research firm IDC predicted that the global smartphone market would "remain challenged through the first half of 2023." That slowdown will also impact Qualcomm's smaller licensing (QTL) division, which generates royalties and licensing revenue from its wireless patents. This segment operates at much higher margins than the QCT unit.
Therefore, the bears believe the simultaneous slowdown of Qualcomm's main revenue and profit engines will make it an unappealing investment in a wobbly sector. Furthermore, Qualcomm still faces stiff competition from MediaTek in the low- to mid-range smartphone market, and it expects to eventually lose Apple (AAPL -1.22%) as a top customer by fiscal 2025 as the iPhone maker replaces Qualcomm's baseband modems with its own in-house chips.
Faced with all these challenges, analysts expect Qualcomm's revenue and adjusted EPS to decline 9% and 18%, respectively, in fiscal 2023. That deceleration could prevent Qualcomm from outperforming the market.
What the bulls will tell you about Qualcomm
The bulls believe the smartphone market will gradually recover. Looking beyond the near-term headwinds, IDC expects smartphone sales to start climbing again "across most regions" in the second half of 2023 as more consumers in emerging markets upgrade their aging devices. It also expects carriers in developed markets to sell more devices with bigger promotions, better trade-in offers, and more flexible financing options.
That's why IDC expects global smartphone shipments to rise 2.8% in 2023, compared to a decline of 9.1% in 2022. China's decision to end its draconian zero-COVID policies could also accelerate that recovery. Meanwhile, Qualcomm could rely on its stronger sales of automotive and IoT chips to offset its slower sales of smartphone SoCs and modems. The automotive sector should remain a bright spot as automakers install more chips to power their connected and driverless features. That diversification could also mitigate the impact of Qualcomm's gradual decoupling from Apple.
Lastly, most of the smartphone market's slowdown should occur in the low- to mid-range market. The premium market, which Qualcomm remains firmly in control of, could remain resilient as more consumers pivot toward longer-lasting devices that can be used for several years. Looking beyond Qualcomm's current slowdown, analysts still expect Qualcomm's revenue and adjusted EPS to increase 12% and 20%, respectively, in fiscal 2024. The company also plans to pour billions of dollars into fresh buybacks and dividends even as its near-term revenue growth stagnates.
Which argument makes more sense?
Qualcomm's stock might not recoup all of its 2022 losses this year, but I believe its stock will bottom out at its current levels as investors realize its near-term challenges are merely cyclical and not existential. As one of the world's largest mobile chipmakers, Qualcomm should continue to grow over the long term as more devices (and not just phones) are linked to the internet. In short, Qualcomm is still a great stock to buy for investors who can tune out the noise and ride out the volatility.
