Mobile chip giant Qualcomm's (QCOM 0.73%) results are in for the last three months of 2022 (Qualcomm's fiscal 2023 first quarter), and they were as expected: not great.
As has been the case for other consumer-facing chip designers, financials are suffering as smartphone sales slowed this winter. Much of the slowdown was caused by a sharp drop-off in consumer electronics spending after more than two years of early pandemic-fueled phone, PC, and laptop spending.
As far as Qualcomm management is concerned, this slump still has its limits, and growth should make a comeback in the second half of 2023. For investors who like dividends and the potential for stock price growth, there's still a lot to like about this stock.
An ugly quarter, but two really positive developments are brewing
Qualcomm's Q1 2023 revenue was down 12% year over year to $9.5 billion, within the guidance range the top team provided shareholders with a few months ago. Adjusted earnings per share (EPS) was 27% year over year, and generally accepted accounting principles (GAAP) EPS was down 34%.
Leading the leg down for Qualcomm was, of course, plummeting Android smartphone sales. QTL (Qualcomm Technology Licensing, patents the company owns on wireless capabilities it licenses out to other businesses that manufacture mobile network infrastructure and devices) was down about 16% from a year ago to $1.5 billion. QCT (Qualcomm CDMA Technologies, basically the segment that makes money off the sale of chips) fell 11% year over year to $7.9 billion.
As bad as it may look, there were some bright spots within QCT in the automotive and IoT (internet of things) sub-segments. Qualcomm's management team (CEO Cristiano Amon, who took over in the summer of 2021, and CFO Akash Palkhiwhala) have made diversifying Qualcomm outside of the smartphone market a top priority. Good progress is being made. Auto revenue was up 58% year over year to $456 million in Q1 fiscal 2023, and IoT was up 7% to $1.7 billion. Collectively, these two segments were only 27% of QCT chip sales, but they're rapidly catching up to Qualcomm's bread-and-butter phone circuitry.
With automotive technology expected to have another great year in 2023, and other top trends like virtual reality headsets helping drive these two segments higher, Qualcomm is well on its way to being far more than a smartphone company.
A very shareholder-friendly chip stock
On the earnings call, Palkhiwhala explained that the previous outlook for the smartphone slump to last through the first half of calendar year 2023 (third-quarter fiscal 2023 for Qualcomm) is still in effect. Qualcomm is under-shipping chips to help its manufacturing partners work through excess inventory right now.
The result? Second-quarter fiscal 2023 revenue will be down as much as 22% year over year (slightly backtracking the 41% year-over-year revenue growth in the same quarter last year). Adjusted EPS and GAAP EPS will be down as much as 36% and 40%, respectively.
The good news, though, is that Qualcomm is still a highly profitable company, even in the midst of a severe downturn. Free cash flow (FCF) is also making a big comeback as the company looks for ways to pare down expenses. FCF was up 83% year over year to $2.7 billion in Q1 fiscal 2023, and I expect this profitability metric to continue to rally through the next year.
FCF generated was more than enough to cover the $842 million in dividends (good for an annualized yield of 2.2% as of this writing) and another $1.3 billion in share buybacks (nearly 1% of Qualcomm's current market cap, if you're looking for a dividend yield-like equivalent on share buybacks) during the last quarter. This is an incredibly shareholder-friendly business that remains dedicated to returning lots of excess cash to investors.
Qualcomm stock currently trades for 19 times trailing-12-month free cash flow and 13 times trailing-12-month GAAP EPS. The price-to-earnings ratio may get worse in the coming quarters before the smartphone market bottoms out, but with FCF back on the rise, Qualcomm stock could actually get cheaper as 2023 progresses. Either way you want to value it, Qualcomm looks like a great value in my book. If you're looking for dividends and long-term stock price appreciation combined in one solid tech stock, Qualcomm is worth a serious look right now.
